Posted by ray@lcorn on January 15, 2001 at 22:31:33:
You won’t find any sympathy here… most of us are looking at the same types of deals you’ve seen. However, just because you haven’t found a deal doesn’t mean that the property type is wrong, or that the information you have received is wrong either. In fact, the prices you are seeing are precisely the result of the property type being just as advertised… and there are a lot more buyers than sellers. The reason is pretty simple.
In most areas, mobile home parks are a government protected franchise. Why? Think about it this way… how many communities do you think you could walk into the local planning commission and get approval for a new mobile home park? I have asked that question in seminars all over the country, and usually a couple of hands will go up and the folks will relate that their town or county has no zoning, and so anything can be built. And certain low or slow growth areas will welcome the project just because they need more warm bodies of any kind. But for the rest of the world, a mobile home park is the ultimate NIMBY (not in my backyard) project. In addition to being a real estate developer and investor, I am also a planning commissioner, and the only other project that draws any where near the same opposition is an auto junkyard. I would think twice before trying to get one through my own planning commission.
So what does that do to existing parks? It makes the price go up. Add to that the immobility of the mobile home, which creates a very stable tenant base, and you have a situation where the rents can increase incrementally each year, pushing up the NOI, pushing up the value, and the owner knows that competition will be nil for the forseeable future. If you owned that park you’d have it priced in the ozone too.
And there is one more factor affecting the market. About ten to fifteen years ago, the big REIT buyers discovered the property type as well. Flush with oodles of cash to spend, they snatched up every park of any appreciable size (150+ spaces)they could find, paying prices that most of us can’t even think about. And because their money is what I call “patient money”, meaning that they could wait on incremental rent increases to provide a relatively decent (by their standards) return over the long term, the rest of us are left fighting over the scraps.
The answer to the problem is that you have to dig deeper to find the deals. You go after the parks with 50-100 spaces, probably rough condition, maybe with a ton of park owned homes, but in a good market with a growing population. Then you grind the seller with deferred maintenance expense during due diligence, with an eye on the upside potential from infrastructure upgrades, submetering and in-park sales on newer units that raise the curb appeal of the park, and spin off some nice cash flow from the financing as well. You buy it right, improve it, put competitive financing on it with a cash-out refi after three years or so, and then wait for a buyer to come along that doesn’t know what I just told you.
These deals do exist… in fact a broker brought me one today… 200 spaces, asking price a 12 cap, saying that is highly negotiable without being asked, owner financing, and serious problems with the sewer system. I’ll look, because thats the type of deal that can be a home run if you get your ducks in a row on the improvements, and once fixed its a prime candidate to sell to the REITs at an 8 or 9 cap.
The only strange thing about the deal is that a broker got involved before I heard it was for sale. Usually we find that type of deal while out riding around the back roads or searching the yellow pages. I wrote a story in “DealMakers Guide to Mobile Home Parks” about a broker I know that travels the southeast calling parks and asking if they will sell. Be surprised how many of those mom and pop parks can be bought just because you asked the question at the right time. This broker specializes in the small ones, because that’s where the deals are. If he came to your area, would he find a park you don’t know about?
If you’re serious about finding one, you’ll have to do some legwork. There are folks here that have been looking a long time, and in some markets the product just cannot be had at anything near a decent price. But don’t doubt what you’ve been told about the property type… the problem is it’s all true!
ray