The MHP Broker’s Tips and Tricks Podcast: Seller’s Guide – Episode 1: What Is Your Park Worth?

Maxwell, hello and welcome to the mobile home park broker’s tips and tricks. This is the podcast where we talk about mobile home park investing, because that’s what we’ve been involved in for the last decade. Let’s dive into today’s episode. Here is your host, Maxwell Baker.

00:22 Maxwell Baker

Hey, y’all, welcome to another epic episode of The Mobile Home Park Brokers Tips and Tricks Podcast. I am your host, Maxwell Baker, yours truly, CEO at the firm. Today we’re going to be talking about your seller’s guide. So, this book is what I wrote a little while ago, for all y’all sellers, all you sellers, depending on where you’re from, as I’m going to say it, all you guys and girls out there that are sellers of mobile home communities. Today, we’re going to be going over that book. So, I’m going to be doing a little bit of a summary, but also be reading directly from the book. So, here we go. So, the introduction of this book was developed over the need, over many years that I have been in this business. It’s because there a lot of sellers out there that have taught me a lot of things on what to look out for. So, this book is really made from a lot of people, a lot of conversations, 1000s of hours of me just hammering my head through all of this knowledge. So, there’s a lot of horror stories, and there’s a lot of things that I’ve learned to basically avoid for you sellers out there, and I developed this also to get rid of those wheeler-dealer brokers that like to what we say in the brokerage industry ‘buy listings’ and what that means is, you know, they will over promise a price and then beat you down to what market levels are by just saying, lower your price, lower your price!

02:03

So, it’s a kind of sleazy, slick way to run a brokerage that a lot of our competitors do, and we won’t name them, but we don’t do that here at the firm, because it’s just bad form. It’s slimy, like we don’t do that. So, this book was here to help you all navigate all that stuff, how to choose the right broker, how to choose the right buyer, all that jazz. So, we’re gonna right now jump into chapter one.

02:35

What is your park worth? That is Chapter One.

When you don’t know how to value your mobile home park, the biggest thing that can go wrong is just missing the mark on your pricing. I’ve seen brokers, as well as sellers come to market without any clear idea of what their community is worth. They’ll either price it way too low, leaving money on the table, or way too high. So, they just get laughed at the entire way, all the way to closing, not even a closing, because they’re not getting the closing because they priced it too high, right? So, let’s lead into what makes other parks more marketable than others. So, important things that make your park more sellable include the organization and condition of your infrastructure, how your management is structured and organized, the cleanliness of your books and records, that is probably one of the more important ones, because the more data you have, the more money you got. That’s how it works. Your community’s curb appeal, obviously and then the Resident Composition. What that means is what the demographics are of your residents and you know, if you’ve got more families in there, or more day laborers, or you’ve got man camps, or you’ve got, like, the tiny home demographic, all those different profiles affect the pricing. It’s kind of teetering on some sensitive stuff for a lot of people but at the end of the day, money doesn’t look at that kind of stuff. It just looks at risk and whether or not there’s a lot of movement, because what all the investors out there are looking at is, how stable is your community? Is it a revolving door? Do the police get called every week? You know what I mean. So, it’s just whatever brings less risk brings more money. So, these are some of the leading variables and from what I’ve seen over almost, I would say almost 15 years in the business I’ve been doing this. I can’t believe it’s been that, but I’ve sold probably close to 500 communities in my lifetime been involved in, and those are the biggest variables that we see. So, moving on to well, let’s go into deep dive in some of these things.

05:00

Your books and records. So many times, people think that taking cash receipts is a great way when it comes to filing your taxes for obvious reasons. On the front end, it looks and sounds great because you got a pocket full of cash sitting under your mattress that Uncle Sam doesn’t have any idea about, which I don’t condone doing because A, it’s illegal, and B, Uncle Sam’s always going to get his nut. It doesn’t matter whether it’s every year as operating, but it is going to affect you on the back end, if you ever sell. Now, if you never sell and you just run a cash business that’s on you like I can’t tell you how to run your business. I can only tell you what’s going to bring value and if you do all cash, you can’t prove that you’ve been making that money, because banks are not going to finance cash. They need to see deposits into a bank account that you pay taxes on. So, that’s one of the biggest things that a lot of people think that doesn’t matter in this industry, but it does, like a lot of moms and pops out there, collect cash, when in reality, it doesn’t help you on the exit. It helps you while you’re operating. You can go pay cash money for everything you want but as far as selling, lenders want to see deposits and receipts. That way they can verify that you actually are collecting that money.

06:24

So, moving on to the empty lots and raw land. If you’ve got empty lots and raw land in your community, there’s a couple of things there that are variables. One, the area, like in some areas in Louisiana, you’ve got dealerships paying lot rent just to hold the lot that they have found in your community, just to hold it so they can actually bring in a tenant that they sell a brand-new home to into your park. So, a lot of times, sometimes, like I said, they’ll pay the lot rent, which is crazy. Then you’ll go into like, really, country town, middle of nowhere, USA, and to get a mobile home in there is you got to go out and buy one, bring it in, and then finance it for the consumer. So, that’s the other end of the spectrum. So, it’s all market driven, and we can determine that, when we do the analysis on your community, what kind of community you have, we do some test ads and see what the kind of demand is for the area. Typically, if lot rent is high, meaning over $400-$500 a month, it’s going to be teetering on the first scenario I gave you but if it’s like $100 or $150 to $200 lot rent, more than likely it’s going to be the latter, where you have to go find the unit then finance it for the consumer. So, in my book here I say 300 but right now it’s closer to 400 is the threshold to start seeing some real interest from consumers moving a home into your park, moving on to knowing your numbers. Let’s say you want a 50 Park, 50 space park with some raw land in which you add another; which on that raw land you could add another 50 lots. So, a total 100 lots, but only 50 built out and once it’s built out on those extra 50 lots, I have $300 here in the book, but like I said, we used $400 now in these days, but we’ll stick to the book, $300 lot rent. Once you fill up those lots, you’re looking at a pretty nice little annual income of $180,000. That is pretty good. Even if those lots cost you about $20,000 to build, you’re still going to get north of 10% return on your investment using a 35% expense ratio. So, you take that lot, which was once full, and use a 35% expense ratio. If you sell that park at an 8% CAP, you’re looking at a sales price of $1,462,500 for those occupied 50 lots. Then you would subtract the million dollars it took to build out those 50 lots, $20,000 a lot like I mentioned earlier, which leaves you with a $462,500 in value for those undeveloped lots. If you don’t know the term capitalization rate or cap rate, it’s the percentage of the results from your net income getting divided by your purchase price. So, circling back to the net, net, net of $462,500 that would be divided by 50, and that is what I would price as your broker. I have to look; I don’t have my calculator here. What is that? You stand by, I will tell you momentarily. Y’all, that’s $9,250 a lot. So, that’s what I would price your empty lot at; per empty lot. So that’s 50 lots. Keep in mind this, if and when it costs $20,000 to put a lot and be ready to move in a mobile home.

10:13

So, moving on to utilities and sewer. Now, the less risk, the better. This is pretty boilerplate. If you’ve got well and septic, you got more risk than a park that’s got city water and sewer. Its just more variables equal more risk. Fewer variables equal lower risk. So, as an investment, yeah, money follows where it can flow easily and not have a bunch of heartburn, of stuff blowing up in your face, like a Septic tank, failing, field line failing, well dried up, well getting tainted, whatever it is Sewage Treatment Plant blowing up. Money flows where it’s easiest, right? So, the higher the risk, the less rub you’re going to have with that money flow. So, keep that in mind. The book kind of goes into a little bit more details, but I just gave you the summary. That’s basically what it does items that will increase your marketability. This is the kind of knowledge I’ve obtained over a decade as a mobile home park broker. Yep, decades; been about 15 years now, beyond the risk of factor of utilities.

11:30

It’s common to hear a newbie or a first-time buyer come to me and say, Max, I’m looking for city water all I rent in a primary market like Atlanta or Nashville, 100% occupied at a 10% CAP. Y’all, I get these types of emails all the time, and I laugh every time I see them, because if it was a real 10% CAP, wouldn’t be being sold to you. It’d be made to five phone calls or less, and that deal would be gone. It doesn’t ever hit the market. Those types of deals move very quickly. So, you got to be either very nice to your broker (clears throat) I like to hear how beautiful I am. I’m messing with y’all! Or you go out and find it yourself and you negotiate a very good deal for yourself but everybody wants that type of Park. The least desirable Park will obviously be the lagoon or the sewage treatment plant or any kind of private utility. But again, it’s about risk and reward.

12:27

Another variable to consider by newbie buyers is the number of Park Owned Homes you have in your community. Typically, institutional lenders don’t like to see Park on homes, though, community banks have a different approach. Institutional lenders typically don’t like to see more than 15% to 25% Park on homes. I’ve even seen it up to 30% it changes every year, and they’re not willing to lend on communities that have more than that, because they view it too risky. The number of Park Owned Homes you’re going to have will really affect your buyer pool as well. Y’all, there’s just more buyers out there looking for lot rent deals because they don’t want to crawl under those mobile homes you got and deal with those repairs, or they don’t want to manage the contractor, who may or may not be a knucklehead, hopefully he’s not, or she’s not, but there’s just more variables, right? You got more variables. You got more risk, albeit you get more money with a Park Owned Home, but the same time, it’s kind of like, Why do I want to work more (laughs)

13:32

So, the most desirable communities moving on are the City, dedicated roads, direct build city water and sewer, everything the tenant pays. It’s about as close as you can get to a triple net deal. The privately maintained roads obviously have more risk, risk reward, right? Same thing. Dirt roads are the worst you can get but there are some city-maintained dirt roads out there y’all. I have seen them, and I have sold them, and you make a call, and they come out there with their tractor with a little scraper, and they just go through and scrape all those little bumps out and it’s done, but it’s city-maintained. It does exist.

14:17

Then you’ve also got professional management. This is a big variable as well just the management side, just because everybody’s very different on how they operate their mobile home park. So, you really need to dive in and see whether or not it can actually be operated from afar. Or do you have to live there and deal with that every day? It just depends on the system, method and processes that park owner has. IEU, the more system method and processes you have, the lower the risk means, the more money you’re going to get. So, I have this section right here that says, ‘What do municipalities allow?’ That really just depends on whether or not you can move in homes into your park. I’ve seen some crazy stuff where, if the lot has been vacant for 12 months, then they won’t let you put it in there. Another one is, if a mobile home is older than 10 years old, they ain’t gonna let you put it in there. If a mobile home has got less than 1000 square feet, they won’t let you put it in there if it’s got metal siding; I mean, there’s like, a laundry list of things, but you really need to check to see because that’s ultimately going to affect; if you can’t move a mobile home into an empty lot, that’s going to be a problem, you know, and that’s going to affect your price. So, we do have some great attorneys that we use and recommend you using to try and get a zoning letter or some sort of letter from the municipality to allow you to do that but yeah, how many Park Owned Homes do you have? We talked about that a little bit with the lender situation. But in general, the more Park Owned Homes you have, the higher the risk. Albeit, the homes are worth money y’all. I’m not going to sit here and tell you that the homes are not worth anything. You’ve got these buyers that come to us all the time and it’s like, ah, that home’s only worth 500 bucks. I’m like, please, man, I put that thing on Facebook marketplace. I can get 20 grand out or 25 or even 30. So, don’t let the buyers out there tell you dictate what the homes are. You know what that home is worth, and you start at that price of what you can sell it on Facebook, and that’s where I would price that home. Now, as far as the CAP rate stuff on the lot rent side, you literally have two businesses. You’ve got the park on home revenue, and you’ve got the lot rent revenue, and they both have their own individual expense ratio. But when we evaluate your community, we separate all that stuff, even if you don’t have two separate contracts for the lot rent and the park owned home rent, we go out, figure out what the local market lot rent is, and we determine that number, and then we price it based off of a CAP rate of that we’ve been seeing trade, and that’s how we come up with a value to help you, guys and girls to get the highest price you can on your community. It’s all about you’ve probably heard it before. The Community Price Maximizer program that we have here. It is our proprietary system that will guarantee you a higher price when you exclusively list with us. Four step program, includes all these little things I just talked about in the first chapter, and you can call us at (678) 932-0200, or email me info@themhpbroker.com