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Because manufactured home sales are up, traditional home sales are slow.  Housing agents have not yet decided if this is a sign of a good economy or a bad one.  Many of their costumers want to downsize their payments for housing, but keep the same amount of space.  To do so, they are turning to manufactured homes.

Claudia Harris, of Harris Custom Homes, says, “We have a lot of blended families, who have your, mine, and ours children.  They need a lot of bedrooms, but they can’t afford that in the site build homes.  So, they choose manufactured housing and our financing is very low right now, it’s a good buy for large families particularly.”

Manufactured homes cost about one-third of the price of traditional homes.

Frank & Dave’s Opinion of This Story:

The core of the mobile home industry is affordable housing. That being said, the manufacturing and retail parts of the business can quickly lose sight of that fact. Manufacturers are trying to build cheaper floor plans, and retailers have greatly reduced mark-ups. But you have to wonder if they will stick with that plan if sales begin to rebound. To work as a business, mobile homes have to provide a quality product which, in addition to lot rent or land payment, comes in at or around $500 per month – not $1,200+ per month as many customers have unfortunately been stuck in due to overzealous sales people.

Once worth several million dollars, Anderson has made a drastic change in her living arrangements.  She went from a Malibu Mansion to a one-bedroom trailer located in a run-down trailer park.

The debt-ridden actress is raising her two children, Brandon and Dylan, in the park while struggling to make ends meet, claiming she wouldn’t change her life with anyone else’s.

“The boys and me love the trailer park, it’s a special community, we’re happy here,” Anderson has said.  “It’s the most beautiful place, it’s where I take my motorcycle, my surfboard.”

She later added, “There are firemen with their children, surfers, all sorts.  The children are so happy.  I wouldn’t trade my life with anyone.”

Frank & Dave’s Opinion of This Story:

When we first saw this story, our initial impression was that it was a joke. With a bit of research, though, it appears to be true.

Living in a mobile home gives many people a feeling of divine freedom, as they are not tied to any standard conventions on housing and lifestyle. Pam Anderson has always been a “free spirit”, so it looks like she matches up to the product perfectly.

What’s crazy is why the Manufactured Home Institute has not jumped all over this story to promote the mobile home product. Can you even hope for a better testimonial or spokesperson? Hopefully, somebody can shoot a few pictures of her in front of her singlewide before she moves back into a beach house in Malibu, and promote those aggressively via the National Enquirer, etc. That would really give the industry a shot in the arm.

Barry gave “Four Key Strategy Areas” that, if adapted by a community owner would have a big improvement on the   bottom line and the growth prospects for the community.  The four key areas are things anyone can do now without a lot of cost, but the clincher is changing the     mindset.  As you read Barry’s list, think about what kind of a community business you would have if you adapted even one of these.

1)  Market Niche Focus

When you bought your first community, were you more knowledgeable then about where your customer was coming from?  Were they coming from apartments?  What was their reason for moving into your community?  Where would they have lived if they weren’t in your community?  Are community owners as up-to-date on housing choices in their local markets as they need to be in order to compete?  Maybe not, suggests Barry.  We need to address the new realities of the housing market. Has our niche changed?  Do rents need to go up or down?  Has our market changed?  To rent sites and sell and rent homes, the community owner needs to adapt to a changed and changing marketplace.  In my market, for example, the demand is for rental homes, but not so much for buying homes.

2)  What is My Plan?

Barry says that we need to be realistic and figure out if we can afford to address the new market realities.  What he is suggesting is that community owners need to know the following about their customer:

• What is the credit profile of the customer I am willing to finance?
• Can they make a down payment?
• What is the age of the home?

What is the plan for the capital to finance the homes?  Two important things Barry noted are:

• Community owners need to be in compliance with the law to finance homes.
• Many owners are running out of cash to finance homes.

(In conjunction with financing of homes, Warren Buffet noted in his 2009 annual   report that unless reasonable financing becomes available, manufactured housing demand will continue to shrink).  To finance homes we need systems that are effective, efficient and compliant.  Do our homebuyers know that they are building equity in their home and how much their equity is? Do they know, assuming their buyer passes the tenant screening for the community, they can sell their home and move on?  On this last point I’m    guessing probably not.  Residential real estate agents do this all day for site-built homeowners, but in the community business, residents don’t get much support from anyone when it comes to figuring out their options, equity being one.  Which may be one reason for the customers’ not buying in a community to begin with.

3)  Resident Pride

We need residents that feel proud about living in the community and want to stay.  This can be accomplished by having management structures in place to retain existing residents.  The retention system needs to include activities for residents and keeping the appearance up.  The rules need to be enforced firmly but politely.   Residents that are under water on their home’s value are no more stable than a renter.

4)  Financing Homes
Community owners need to get creative and think of ways to raise capital to buy more homes and finance them.  The Manufactured Home business is starved for  capital for the consumer to purchase a home.

There is plenty of capital piled up on the sidelines and investors are looking for investment opportunities.  For a well run income producing operation, there are investors.  One idea is to take on a partner, perhaps in a minority position.  Barry said that today a chief worry for the communities is that community owners may not be able to afford to keep up their communities. In addition to rising real estate taxes and operating costs, the cost to buy, fix up, market and finance homes in communities may mean that some, perhaps many, owners simply won’t be able to afford to be in the community business.  Hard choices about selling their community may be in store for some.

MONEY IS COMING BACK TO REAL ESTATE

Dr. Peter Linneman, Chairman of the Wharton School of Finance and economist for NAI states that not only is the money coming back to real estate, but that:

• Multi-family real assets will rebound first, before office, retail, industrial.

• We are at the top for cap rates.  Translation—prices have hit bottom.

• Little has changed in the economy in the first quarter of 2010 but the psychology of the recession has changed.  It’s been said that investors and consumers are mentally   either in fear or in greed.  During the boom years spending and taking risks were the so- called greedy behaviors. When the recession set in, greed quickly turned to fear.  Thus, the tightening of credit. According to Dr. Linneman, how people feel has changed.    Investors and consumers are edging from fear to courage, and from inaction to more  aggressive behavior.  The pendulum is beginning to swing toward greed.

• No new multi-family, including communities, are being developed.

• Pent up demand is and will continue to build.  One reason is the millennium generation coming out of college.  Because it is so tough for young people to find a job in the current economy, many are moving home or doubling or tripling up with friends.  Once they get jobs, they will be moving into their own homes.

• Inflation will be a factor.  As household formation picks up, rents will increase and so will home prices.

• Another recession will occur in 7 to 10 years.  Dr. Linneman says that when debt is cheap and/or easily available it mostly benefits sellers, not buyers.  If you are an owner that is wondering when is the best time to sell, you may want to think about…

      a) selling soon before capital gains taxes go up and interest rates go up, or

      b) waiting for another 7 to 10 years for the next “bubble” and sell at the top of that cycle.

• Interest rates will rise faster than cashflow. Prices of real estate will not go up as fast as interest rates.

• Real estate taxes will go up.

Distressed Buyers

CNBC, the cable business channel held a conference in Vancouver this year. They said that there are more distressed buyers than distressed sellers, meaning there are more buyers wanting to make investment in real estate that produces a cash flow than there are properties available.       Certainly for the park and community business there is a dearth of parks and communities available for investors to  purchase.

Water Usage & Water Cost

A midwest community owner knocks on doors in his community with a plumber in tow.  He asks the resident if he and the plumber may check the faucets, toilets, etc. for leaks. They fix the problem on the spot and charge the resident.

Switching From Investing in Communities to Apartments

A long time investor in communities said recently that he is now buying apartments, not communities.  The simple reason is financing.  Investing in communities is nearly impossible if there are community owned homes.  With apartments, the lender doesn’t lend on the real estate and not the apartments.  It’s a one stop shop for getting a loan.  With rehabbing, selling or renting homes and financing homes, he says that a manufactured home community has become a tougher business.

Murder Headline Misleads Readers

The following was a “Letter to the Editor” in the Cedar Rapids Gazette:

Regarding this March 11 headline, “Man Charged in Mobile Home Death”

I wonder why the editors focused on the type of residence in which the death occurred. Had the alleged murder occurred in a single-family home of traditional  construction style, would we see that in the headline, “Man charged in single-family home death”?  I think the implications being made here are rather irresponsible and are attempting to lead the reader to some unsubstantiated  conclusions. If there is a point the editors would like to make regarding crime and             socioeconomic status or lifestyle or  whatever, the opinion page is the proper place for such discourse, not the front page. In addition, I believe it was a young woman who died, not a mobile home.

Homes Moving Out

A community owner reports that some residents are getting heavy handed when it comes to getting the community owner to buy their   manufactured homes.  He says that a few residents have threatened to move their homes out if the community owner won’t buy their home

Joanne M. Stevens, CCIM

Park and Community Specialist

NAI Iowa Realty Commercial

Brokering mobile home parks & manufactured home communities throughout the U.S

Cheryl Warner was discovered to have deposited tenants’ rent money into her own account while serving as manager at the 178-space park. The theft was discovered in 2008.

The manager had tried to put the money back in the account “but it snowballed out of control and she was in over her head” said her attorney Phillip Heithecker. She claims to have needed the money to support an adult daughter who was seriously ill.
Frank & Dave’s Opinion of This Story:

It’s a shame this owner did not read any of our stuff – he’d have known the dangers of accepting cash rents. The park has said that they will no longer accept cash after this fiasco – but it’s a little late now. Frank found a manager once, during due diligence, that had stolen $30,000 in rents over a relatively short period. But this manager had that one beat by a mile. The next time you think your grandmotherly manager would never do such a thing, just remember this story.

Channel 38 went on the air in 1989, and was started by Saint Clement Episcopal Church, The Channel 4 building was built in 1940.

Galaway moved to El Paso in 1961, and developed 450 mobile home lots while working full time as an electrical technician. “The Bible says to go into the world to spread the gospel” said Galaway. “This is my way of doing it”.

Frank & Dave’s Analysis of This Story:

It’s pretty neat that a guy can make enough money with a mobile home park, on the side, to pay for his dream.

Glenn Whitaker, the owner, says that he is closing the park because he is in bad health and the park is as worn out as he is. The sewer lines are bad, and few of the residents pay their rent – and he doesn’t hassle them because he knows they can’t afford to pay it.

“Well, I’ve known Mr. Whitaker for 40-something years…his health’s not good and it’s time for him to retire” said resident Fred Case.

Whitaker has offered to bring in a moving company for the tenants at a reduced price.

Frank & Dave’s Analysis of This Story:

The next time your tenants complain about a rent increase, this is your argument. If the park does not make money, if it cannot pay its bills, it will go out of business and they will have to move out. If this park cash flowed, it would not be closing down. It is in your tenants’ best interests to make sure that the park’s financials are healthy – for their own sake. Remind them of this.

The type of park you’ll need

To make an immediate $100,000 in cash flow with a mobile home park, you’ll need to find a park that has around 80 lots. A park with 80 lots is going to cost around $800,000 and will require about $160,000 down (although in select cases, you may be able to get away with $80,000 down).

The park will need to have city water and city sewer services, and be in a market of at least 100,000 population.

How the deal must be structured

You will need to buy the park with seller financing. You’ll want to put between 10% and 20% down, and the note should be non-recourse. Try and get a note length of at least 7 years, so that you have plenty of time to refinance it before the loan comes due. If you are unable to seller finance it, you will be burdened with two things: 1) a larger down payment, as banks right now want around 25% down and 2) banks will only give you recourse debt.

How to create the $100,000 of cash flow

Your goal is to create an additional $100 per month of cash flow per pad. You basically have two components to this 1) raise revenue and 2) cut costs. Let’s go over raising revenue first.

Mobile home park residents are at a great disadvantage when it comes to raising rents. It costs them $3,000 to move their home. So unless they have $3,000 in cash burning a whole in their pocket, they really have no way to move out if they don’t like the new rent amount.

Most parks you can find for sale are under-market in their rent. So you’ll need to find one that is $50 per month under market – which is not that hard to do. That $50 rent increase is going to get you half way to your $100,000 per year goal.

In some parks, you will also find vacant park-owned mobile homes. Getting these back in service may also be a critical path to getting the rent up at least $50 per pad.

Now let’s look at the expenses. The single largest cost in any mobile home park is the water and sewer. In most parks it equals 10% of the total revenue. So this is your first stop in trying to get the costs down. Often you can accomplish this with finding and fixing leaks in the system, or leaks in mobile homes. Other times, you will need to separately sub-meter each space to make sure that the tenant conserves. And in many cases, you’ll want to bill the customer for their own service.

The second big area to attack is the management cost. In many parks, the manager that is getting paid $30,000 per year can be replaced for 1/3 of that. That one step alone can often get you $20 per pad per month in savings.

Here’s the score card.

Getting that $100,000 of cash flow is predicated on raising rents and lowering costs an average of $100 per month per lot. If you can get that done, then you will have 80 lots x $100 per month = $96,000 of cash flow per year. But that’s not all. You also have to factor in your cash-on-cash return on the money you put down. That will push you over the $100,000 mark.

Next steps.

As the mobile home park industry is an extremely odd niche, it will definitely be in your favor to learn more about it, by taking a course on mobile home park investing. You can also find thousands of parks for sale without even leaving your house, by visiting such sites as Mobilehomeparkstore.com and Loopnet.com.

The economy isn’t wasting any time falling apart. Should you be wasting time not getting started?

Despite criticism by many groups claiming that the government is creating a nightmare by allowing these trailers to be sold without any oversight as to what they are actually used for, the government has decided to move ahead with the sale, since it has spent $220,000,000 in storage fees on these units over just the last three years.

Building inspectors in Fenton, Missouri recently found Katrina units, sold to be scrapped, being used for housing at a mobile home park.  “What if Toyota ordered a recall, then simply put a sticker on its vehicles saying that they were “unfit to drive” before re-selling them?” said Becky Gillette of the Sierra Club.

The sale is under review by the Justice Department.

Frank & Dave’s Analysis of This Story:

You have to hand it to the U.S. government. Where else can you find people dumb enough to spend $220,000,000 just to store trailers. That works out to $40 per month per trailer, which is what a normal retail self-storage facility would charge. Do you think they might have asked for a volume discount? That’s $40 per month for a vacant field with no infrastructure. too. We remember when Katrina hit and the government was renting every available lot in Louisiana for about $600 per month when the market rent was $150 – and then never used most of the lots but kept paying anyway. Now you know where the federal deficit came from.

You will need to be especially observant, after the auction is completed, to make sure any park-owned home you buy does not have the “sticker” and is O.K. to be used as a dwelling. We imagine some special designation will be made on the title. But it’s one more thing to worry about when you are looking at trailers to buy.

However, the Brick Township Council has voted to make the Laurelton Mobile Home Park a “redevelopment area”. Under this designation, the city has broad powers, including forcing the current owner to sell to a developer. But the council is not approaching re-development as an opportunity to get rid of the park. On the contrary, they are trying to find a way to keep the park. “We want the developer to balance the needs of all three parties – the developer, the residents and the town” said Council President Anthony Matthews.

One proposal includes re-zoning the front of the park to commercial and allowing a retail center to be built there, with a redevelopment of the park as part of the agreement. All of the proposals include putting in new water and sewer lines to the park. The city is starting the process of cleaning up the park by delivering roll-off dumpsters to the park within the next few weeks, so that tenants can begin to move the junk out of their yards and into the dumpsters.

Frank & Dave’s Analysis of This Story:

The new-found love for mobile home parks has been a continuing theme in city hall recently. When faced with the necessity of affordable housing, more and more cities are looking on mobile home parks as a much more satisfactory housing type than apartments. Why is that? Maybe it’s because the tenants are home-owners rather than renters. Or maybe it’s because mobile home parks are easier to redevelop way down the road, since they have no structures to worry about. In any event, we’re just glad they’ve had a change of attitude.