The MHP Broker’s Tips and Tricks Podcast: Seller’s Guide – Episode 3: Cashing in on Your Financials

00:00

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 eeeepic 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.

01:04 

Chapter Three. How to cash in on your financials. It’s important to file your taxes in a timely manner. Blah Blah, blah, blah, blah, blah, pay your taxes. Pay your taxes. I know, I know. But Max, I hate paying taxes as a park owner. I like to collect cash and, you know, go buy dinner with cash and, you know, down with the Federal Reserve, right? All that, all that conspiracy, well, maybe not too conspiracy, but you know where I’m trying to get at nobody likes to pay taxes. I get it, but at the minimum, right before you sell your community, you need to have at least, I would say, two years to be super conservative. Of rent deposits in order to properly get some bank financing, you might be able to get it a little bit less, maybe up to 8 to 12 months. I’ve seen that pass through the sniff test with some community banks, but it’s pretty tough. You know, there’s not too many people out there that are willing to finance a mobile home park on, you know, 8 to 12 months of data, but if you at 6 months and you’re ready to sell, you might be able to get the same price that you were wanting to get, or what you and your broker, ie, The MHP broker discussed, if carry the financing, carry the financing, you’re going to have to have to delay the amount of cash you’re going to get into the future. But if you start filing your taxes properly and depositing the rents, it’s ultimately going to allow you to get cashed out at closing. You’re not going to have to carry any paper, so they need to be on your K1s in order to get them approved and through the sniff test for a community bank and if you’re out there trying to sell your community and a syndicator comes to you, or a fund manager, or whomever the institutional buyer is, they’re really going to need to see all those financials, i.e., the two years I just talked about, so they can show it to their investors and really just white glove it, because anytime they’re raising money, the financials have to be white glove. That’s a fact, unless you’re dealing with somebody that’s got a lot of experience, knows how to do work around but when it comes to financials, the more information you have, the higher the price you’re going to get. If you’re vague about your financials, meaning you’re not making deposits or it’s under the mattress, you’re increasing the risk or the exposure for that incoming buyer, because it’s not provable. Now, if you show up with them and say, look, I’ve got six months of cash in this briefcase, let’s do a deal, then that might help a little bit. But the end of the day, you got to have recordable data. That’s what’s needed in order to get fully cashed out and get a community bank or any kind of credit union, or really anybody that’s institutional to give you funding on your mobile home community.

04:16

Let’s talk about a real deal, holyfield story about a no financials mobile home community. So, here’s a story about a park owner that had zero and I mean zero mobile home data financials on their community. The story begins with a nice, beautiful sun is shining grasses cut 65 space community that we heard about as a referral from another park owner we had just closed the deal with. We were down in middle Georgia, and we were trying to sell this community, and the park owner, offhandly, mentioned that he didn’t like paying taxes. Uh oh, right? I nearly had one of the biggest belly laughs when he told me that, because who actually likes paying taxes, y’all so after further discussions, he gave us the rent roll and you guessed it, that was it. This deal was worth about an 8.5%-9% CAP in current market times. Don’t think that 8.5-9% CAP is forever. The current cap rate of selling a mobile park, since we had limited data on the financials of the park, we ultimately landed at a 12% CAP, which was 300 basis points above the 9 or 3 points for layman terms. I guess to land on that 12 cap, I hated it for this park owner, but when you have a park that’s being priced on its income versus real estate value, you’d better have your finances in order. What does order mean? Great question. Give me a call, and I will gladly explain to you what the minimum is in order to get the highest price you can get. I am tongue-in- cheek, giving you a little self-promotion there, but yeah, you can call us (678) 932-0200 or email me at info@themhpbroker.com, and I’ll walk you through exactly what it takes for you to get the premium you deserve when you sell your community, otherwise, you’re going to make great friends with your buyer and the reason for that is not because he likes your smile. It’s because he’s getting owner financing or getting a very, very low price on your community, because nothing is provable. So; but going back to that deal in Middle Georgia, he ultimately sold it out of 12% CAP because didn’t have those numbers.

06:35

So, let’s move on to the next section here, under contract for six months, let’s go in the last part of the story. We just started selling a mobile home park. Is still pretty difficult, even when you have your financials in order, but you’ve bought multiple communities. Always tell me this, because they are just so many variables that could blow up in your deal as your broker, my job is to figure out all of these variables up front so I can set expectations with all the prospective buyers. So, once we told the buyer that we didn’t have any tax returns on this 65-spacer property that I mentioned earlier, he told us, look, I trust you guys, but I don’t trust this deal because there isn’t any numbers on it. I think I’m repeating myself here y’all. The only way I’m going to buy this deal is to sell or deposits six months of rental income into a bank account and shows me the bank statements and shows me the bank statements, I should say which does work sometimes. We’ve had deals where we’ve been on a contract for several months. Typically, it’s 3 to 6 months. You might be able to get away with three, but I doubt it. I have once, I believe maybe twice out of over 500 communities that I have sold transactions but it’s very rare, and a lot of people want to see more than just, you know, 3 to 6 months, but if you’re carrying the financing, um, that might work. So the story that I just, you know, I’m going over, illustrates that what I say to everybody, and that is the next point of that time kills deals. While the deal was under contract, COVID-19 hit, and then the guy’s financial partner decided to bail on him a week before closing. COVID really messed us up, and time always kills deal, because as we were waiting to get the numbers in, obviously we were like, month six, a week before closing, the guy’s financial partner bails out just because of COVID. I mean, time kills deals, y’all. That’s why it’s very important to plan your sale if you’re going to sale, willy-nilly. I understand there might be some detrimental thing that happened in your life, or some transition or, you know, whatever, whatever happens that forces you to sell quickly, but at the end of the day, like that’s not the best time to sell. So, what that buyer told us with the partner, he said, look, I’m not going to do anything for another 60 days Max. So, we’re just going to sit here under contract for another two months until I find another partner or this guy comes back to the table. So, as you guessed it, that did not work for us. Now the deal, we had to wait another 60 days because of COVID-19, the seller just said, look, I don’t know what I’m going to do. I’ve been doing exactly what you told me to do. I thought we had a done deal. We were supposed to close at the end of March, but here we are in May. It was very frustrating, and now I’ve got a buyer seller waiting until May to finalize this deal, but I don’t even know if the buyer’s money source is still gonna be around. Time kills deals y’all. Move into a MythBusters.

09:48

I can close on a park even if I don’t have titles. You must have your mobile home titles when selling your park. Sometimes you can finagle it and get it done but if you’re getting a bank loan, typically the bank is always going to want those mobile home titles. Your owner financing probably not? But the only time I’ve seen a bank not require mobile home titles is if they are a specialized Community Bank that does mobile home community loans, and they’ll typically get it restated, retitled, I should say, and have it bonded. After that bond, it takes about 90 days or longer to get a new title in the mail. So, while several of our banking relationships, i.e., we broker debt y’all, will play ball with us. 90-95% of the lenders are going to require titles at closing for all the park owned homes you own. Community Bank lenders understand that without the home on the lot, the lot is pretty much worthless, because the amount of money it takes to get a replacement home is extremely high. The only exceptions I’ve ever seen lenders not caring about titles are institutional lenders, meaning, like CMBS, and for some unknown reason, these institutional lenders don’t care about titles. The community banks and secondary tertiary markets will be out in the field, walking through the park with the buyer, because they are run by locals versus Wall Street guys and girls. Community banks understand the risk more than institutional lenders and will always want to control the mobile homes you own. The main reason why that is is that the seller has the titles and gets foreclosed on them by the bank. There’s nothing stopping the buyer or the operator from taking all those mobile homes and moving them to some other piece of property, or maybe he’ll make a quick sale with a huge local park owner and you know, within two weeks, homes could be gone and the bank has just sat there with a bunch of vacant land. So, that obviously doesn’t help them. That’s why the value of your mobile home park is always based on the lot rent and if there is no lot rent, you got no value period! But the industry is ever evolving y’all. Bankers are starting to get smart and realize that they need to keep those titles. I think it’s only going to get better for investors as time goes on, as bankers realize that mobile home parks can be some of America’s safest investments.

12:17

Moving on to Owner Financing, buyers, look at owner financing as the mythical unicorn creature that only comes out every so often. I can see it now, a shining light, a big white horn and a rainbow going over that unicorn, aka owner financing. However, owner financing is pretty common in our industry, as many bankers shy away from financing communities because they’re perceived as being too “Headline Risky” that I’ve heard from a hedge fund guy. Little do they know, right y’all, but there are many ways to finance your community. This sky is the limit! I personally love owner financing deals, because if you can’t afford to wait for your money, you can basically have your cake and eat it too. Let me tell you why. If you’ve been light on donating your shares of taxes to our dear Uncle Sam, you can usually still get a good price when it comes time to sell, if you’re willing to carry the financing. The reason is that buyers are not going to have to go through this usual third-party reports, loan committees, blah, blah, blah, blah, blah, all that politics. You get to actually sit back and decide what terms you want and see if you can get the buyer to jump on board.

12:36

As I mentioned earlier, risk is the key issue here. Banks hate risk. From their perspective, missing tax returns equal a higher-risk loan. In situations like this, owner financing is often the best way to command a premium for your park. And you can in many cases, you can achieve at-market or even above-market pricing through seller financing. With owner financing, the buyer typically doesn’t have to qualify the way they would on a traditional bank loan. There’s no appraisal, no bank committee, no financing contingency, and no third-party approval process. What really matters are the down payment and monthly payment terms. The structure still needs to be fair, obviously, but it’s common to see deals with 20%–50% down, a slightly above-market interest rate, and a balloon payment in a few years. One additional (and more aggressive) strategy I’ve seen work is having the buyer sign a quit claim deed that’s held in escrow with your attorney in the event of a default. This can help protect you from lengthy state foreclosure processes and other legal complications. That said, buyers often push back hard on this, especially when they’ve put down significant capital and want some breathing room if things get tight. Ultimately, you get to decide — you’re in control of the property and the deal structure. You can set up the paperwork however you see fit. I’ve both seen and used this approach, but it’s not always easy to get across the finish line. If you want to talk through this in more detail, feel free to give me a call at (678) 932-0200.

15:21

In a nutshell, the best thing you can do is get your financials in order — filing at least two years of tax returns and eliminating any co-mingling of expenses in your expenses with other investments. I’d be happy to walk you through the standard mobile home park expense ratios and help you position the park to maximize its value. If that’s of interest, you can reach me at (678) 932-0200 or email me at info@themhpbroker.com.