Meeting Park Owner -- Need Game Plan - Posted by JeffB (MI)

Real Estate Investing Auctions
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Posted by Dan (Michigan) on December 09, 2005 at 14:28:27:

If union wages don’t drop voluntarily then they will fall involuntarily to $0 an hour, as in?factories closing and moving elsewhere.

I work and live in SE Michigan. The $75 per hour is correct when all the benefits are factored in. It?s tuff to compete with China, Japan, and Mexico manufacturers at those rates.

Most of my note makers are in the $8-$15 per hour range so I think it?s very plausible that reduced-wage UAW workers will create a large pool of potential buyers.

The glass is always at least half full and filling in my World!

Dan

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Meeting Park Owner – Need Game Plan - Posted by JeffB (MI)

Posted by JeffB (MI) on December 08, 2005 at 08:20:48:

I have finally been given the opportunity to meet with the park owner in my “pet park” where I do most of my Lonnie deals. The manager and I get along really well and when the owner found out that we had been able to sell four of his title turn-in units (early 70’s dogs), he wants to meet with us to discuss a mutually beneficial business arrangement. Here’s a rundown on the park as of today:

Size: about 700 spaces
Empty Lots: about 100 spaces
Total vacancy (repos + empty homes + empty spaces): about 150 spaces
Repo homes currently in park: 25
Condition: Very good infrastructure (roads, lot size, etc). But slowly but surely his vacancies are increasing, mainly due to the failing local economy.

The owner of the park used to operate a dealership within the park during the early stages of the park getting started (many moons ago). He since has sold his dealership to another company. Their idea of how to sell a home is to sit in a nice warm office all day and just wait for people to walk in and hand them money. Needless to say, we have sold more homes in his park this year than the in-park dealership.

Yesterday I was approved for my dealer’s license by the state. This was unfortunately a necessary step to earn some credibility with this park, as well as to open up some other types of opportunities (ie, commission deals for banks).

The owner of the park has money out the ying-yang and also owns several other local businesses – the mobile home park is one of the smaller businesses. Still, I think he has a special place in his heart for it since that is what got him started. He really hates seeing these vacancies and the slow but steady decline of his park. Since the in-park dealer is proving inept, he has decided to purchas ALL the repos in his park himself, and get them all fixed up. He believes that based on our performance so far, we can help him sell these homes. I tend to agree!

Most of the repos are newer (1990+) nice singlewides and many double-wides. I’m guessing that, on average, he will have invested 10k into each home (after fix-up). He has stated that he “doesn’t care at all” if he even makes a penny on selling the homes – he ONLY wants to get renters in.

So I’m thinking there’s a real opportunity to create some notes here. If I can find buyers for these homes, sell them for $25k (a conservative estimate), and buy-out his 10k investment I’ve created a real nice note. Here’s the problem: I don’t have the cash to do many of these at all, much less 25 of them. So I considered creating the notes and then selling them to raise cash – but I am not confident there is enough of a spread between the 25k and the 10k after you discount the value of the note (hint: these people will all have FICO scores between 550 and 640). The ones above 640 we will send to lenders in the area who will write these loans. I’ve also thought about asking him to carry the note on each home, but before I propose that I want to make sure there is a win in it for him to do so – right now I’m just not seeing it.

So finally to my question: is there an opportunity here to do business that I’m not seeing? How can I structure these deals? I’d like to keep as many notes as possible in my portfolio but at the same time, have the cash to keep going. I’m thinking about this day and night but really thought I needed to bounce it off the board here to generate some new ideas. And sorry for the Colella-length post but I figured I’d give as many details up front as possible.

P.S. I’m also going to plant the seed that I want to buy this park from him… I think I can prove on paper that he’ll generate a much better income for the next 20 years (if he lives that long) by collecting payments from me versus the headache of worrying about this MHP all the time.

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Re: Meeting Park Owner – Need Game Plan - Posted by Chris Reuman (Maine)

Posted by Chris Reuman (Maine) on December 11, 2005 at 23:58:54:

First, I would e-mail Karl (OH), because he is already working in a huge park.

Much like his deal, get unlimited free lot rent, get park to qualify prospects, and get park to evict your defaulting owners. At the end of the day, the park has to want to fill the 150 spaces enough to be motivated to help you find a way to make this work. You have proven yourself, so get them motivated for the additional lot rent. I don’t know why you don’t want the owner to finance the deals. Personally, I would, because it will keep him honest. He will have a greater interest that you succeed. Otherwise, you can go to private intestors and eventually, a motivated bank.

As for buying a 700 space park, you may want to walk before your sprint.

Best investing, chris

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Re: Meeting Park Owner – Need Game Plan - Posted by Chris (WI)

Posted by Chris (WI) on December 09, 2005 at 16:55:27:

This is a bit out of the box but hear me out. How about an auction? Get creative with the auction don’t just think of a cold crowd of people shuffling through the snow from one tin box to the next as the auctioneer stands on the front steps of each individual mobile home. If all the homes are rehabbed and ready to go you, advertise heavily, have a one day or two day only open house, every buyer gets a packet listing every home, a map, park application, etc. only pre-qualified people get to bid. Sit them all in small room so it seems more crowded than it is and have a buyers choice auction, meaning the highest bid can choose first which of the 25 homes he wants. Even if everyone wants a different home they are convinced that the person sitting next to them wants THEIR HOME! So they bid up to keep the other guy from getting what they want. You can even auction off the lot rent. Let people bid on what they are willing to pay for lot rent. Or you can have a silent auction where people can bid on a home and lot rent and they can mark on their form their top 3 or 5 choices of homes so if their bid is not high enough to get their 1st choice they might be lucky enough to get their 2nd or 3rd choice. This way you can compare all the sheets and get the best price for each unit. I just spoke with an auctioneer who auctioned off 16 apartment units. The poor landlord had a freshly rehabbed building sitting empty, had a very tough time filling it and with the auction he had it filled up in one day. Something about auctions gets people excited. They smell blood in the water, dig up their mason jars or reach under their mattresses and come running. They key is plenty of advertising, pre-qualifying and having everything ready to go. Nothing about the auction precludes you from creating notes if you want with the auction winners.

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Re: Meeting Park Owner – Need Game Plan - Posted by TeddyB_SC

Posted by TeddyB_SC on December 08, 2005 at 12:58:56:

" But slowly but surely his vacancies are increasing, mainly due to the failing local economy."

I would work the park, but I am not sure I would be buying it if the economy is going down. If you think that it is only a temporary slow down, then that is different.

“The owner of the park has money out the ying-yang” ‘He has stated that he "doesn’t care at all’ if he even makes a penny on selling the homes – he ONLY wants to get renters in."

If this is the case, let him cough up the $250k and be your bank. If the homes sell for 25K, he gets 10K(40%) and you get 15K (60%). You can do this with the down payment and the monthly payment. He gets 40% of the down payment and 40% of the monthly payment(and 100% of the lot rent)
This gets him lot rent X 25, and a good interest rate(return) on his money.

This would get you 25 monthly notes with no out of pocket money. That would be hard to beat. Not to mention if you do find some that get bank financing, then you get a 15K payday.

Base your payments on the current market rent less lot rent, and what they pay monthly for taxes/insurance.

TeddyB_SC

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Re: Meeting Park Owner – Need Game Plan - Posted by osupsycho(OK)

Posted by osupsycho(OK) on December 08, 2005 at 11:20:37:

Jeff I am going to take a shot at this by putting forth something that has been rolling around in my head for awhile. It is just an idea so don’t rip me to much and I would love everyones input on this potential plan.

Here is a breakdown of how I see your situation so that everyone understands where I get the plan (note some assumptions, rounding and approximations used).

You need $250,000 to be able to purchase the 25 homes from the owner at $10,000 a piece.

Now for down payments on this note I am going to present it two ways to show the possible variances.

You then are able to sell each for $25,000 on standard notes of $550 month payment for 5 years with no down payment (Option A), or $500 a month with a down of $2500 on each (Option B).

Option A- you get 10% down on each home or $2500 which equates to a total cash in pocket of $62,500. If you are able to sell before you buy (which is something that may be needed to make this deal be pulled off but from the sound of things he may be ok with this) then this money could be put toward the overal cost of $250k. That would then require you to come up with the remaining $187,500. The total monthly collected payments on this option would be $12,500 (25 payments of $500).

Option B- no down payment and the total monthly collected payments would be $13,750 (25 payments of $550) but the overall cost remains $250k.

Now for the meat of the idea. In this plan you have 25 notes that bring in either $12,500 or $13,750 monthly. I put forth the idea of using this pool of notes as collateral to attract 10 private investors with the remaining money to cover the overall cost. This pool thus consists of $625,000 worth of notes at the “industry standard” 12.5% for 60 months with a monthly income at or exceeding $12,500. Here is the package I would put forth for the investors:

With Option A- you need $187,500 so each investor would need to put up $18,750. For this they will receive a very attractive interest rate of 17.89% (put at this strange # to make payment an even #) which makes for a monthly payment of $475 over the same period as the notes or 5 years. At the end of the 5 years this investor will have received a total of $28,500 (a little salesmanship there). So you will have to pay out a total of $4750 a month to these ten investors and that leaves you with the remaining $7750 to pocket for servicing these notes, and (HERES THE KEY TO MAKE THIS WORK) “FULL RECOURSE”. They have nothing to worry about except cashing that nice check from you (or your company) every month (more salesmanship).

With Option B it works out that each of the ten investors pays in $25,000 and gets a payment of $550 a month so you get to keep $8250 for yourself. Again the key is offering FULL RECOURSE.

The other thing that makes this easier is that the investors are not putting their money up against one note, they are not dependent on any one (or two or even three) notes having problems. It is a pool which allows you to handle the inevitable payment problems that will occur while still being able to make your payments to them easily.

One potential pitfall of this scenario is the tax situation (which has been left out above) that would occur from the selling of these homes and I am not sure how to overcome this problem but one option would be that this whole deal is done through a business entity (good idea anyway) and that could alleviate, or at least lessen, a lot of the tax problems. You could also collect more money from the investors to cover the cost of taxes. Even at a worst case scenario of having to pay out 30% in taxes on the profits you are looking at tax bill of $112,500 (profits of $15,000 for each home at 30% = $4500 x 25) and if passed on to the investors it would raise there payments from $475 to $760 a month or a total of $7600 which still leaves $4900 for you (done with option A which is the worse of the two incomes).

Sorry this is so long but it is something that I am trying to formulate as a plan for my future and it sounds like your position is one that could work out with something like this. You can substitute a lot of variables in like more investors with less money each or some other things but the good news is that the numbers are good enough to allow for some real flexibility.

So everyone there it is, my brainchild (with lots of inspiration from posts on this site) and I am ready for critiques, criticisms, or why it just won’t work so unload on me.

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a small thought, others may differ - Posted by Anne_LLC

Posted by Anne_LLC on December 08, 2005 at 11:13:41:

If you want to buy the park, don’t fill his vacancies- you’ll increase its value and decrease his motivation.

Anne

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I was searching the archives . . . - Posted by Michael(KCMO)

Posted by Michael(KCMO) on March 20, 2007 at 11:04:38:

. . . when I came across this post again. Still sounds intriguing, although I still haven’t done it. Has anyone tried this yet? Results?

Michael(KCMO)

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Interesting Idea - Posted by Tony Colella

Posted by Tony Colella on December 11, 2005 at 11:43:18:

I have no idea if this would actually work with the tenant/buyer base we target but I sure do like the thought process!

Even if it did not work, think of what else this type of thinking could lead to.

Nice post Chris

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Re: Meeting Park Owner – Need Game Plan - Posted by Daphne Lowe

Posted by Daphne Lowe on December 11, 2005 at 09:47:22:

Wow!
Talk about thinking outside the box…
I’m going to be pondering on this one for a bit. I may try something like this next year.

Daphne

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Re: Meeting Park Owner – Need Game Plan - Posted by Michael(KCMO)

Posted by Michael(KCMO) on December 11, 2005 at 06:11:09:

That sounds like an intriguing idea. I think that bears further thought.

Hhhhmmmmm . . . .

:-)3

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Re: Meeting Park Owner – Need Game Plan - Posted by JeffB (MI)

Posted by JeffB (MI) on December 08, 2005 at 13:17:40:

I thought of having him carry the paper as you’re suggesting, or having a kind of first/second mortgage situation where there are two notes out on the house and we split the payment based on percentage of the total amount outstanding. My only thought with this approach is that it might come across as quite management intensive for him, keeping track of different notes, interest, late charges, etc. Even if I agree to do all the servicing (which I would), I’d like to get him out of the picture with respect to the loan. Unless there is a way to make this very simple for him that I’m not seeing…

Also, yes the economy here is failing thanks to our lovely UAW union, but I think our long term prognosis is good which is why I’d be willing to consider this park – plus it is in an excellent location.

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Re: Meeting Park Owner – Need Game Plan - Posted by JeffB (MI)

Posted by JeffB (MI) on December 08, 2005 at 12:26:56:

Psycho,

First, thanks so much for taking the time to fully explain your idea. I think you are definitely on to something here. One thing which I did not mention in my original post is that lot rents are an average of about $425/mo. Area apartments go for $650-750 for an average 2Bd or $850-950 for a 3Bd. Having said that, I am left with an average note payment of roughly $300-350. This changes things a bit in your example, because under Option A I would only be receiving roughly $8000 per month from all 25 notes. If my investor pay-out is $4750 that still leaves me some room, but not a LOT of room in my mind because, as part of my sales pitch to the owner, I will agree to cover any lot rent at the point I have to repo a home (note: I am not covering late-pays or non-pays, only after the point an eviction has been completed and I officially take back title to the home. I figure this is better for him than what the banks, ala Greentree, do).

With a pool of homes and notes this large, I’d also want to factor in an allowance for bad debt - there’s no question I will be taking some of these homes back.

But back to the payments, I’m finding that the crappier homes command just as large a payment (albiet a shorter loan duration) than the more expensive homes. I’ve got several notes in this park on old 70’s units which still pay $250 per month.

Yet another difficulty I have been facing is collecting any kind of down payment from these people. Most of them have a couple grand cash, but the move-in costs quickly eat that up. Take a $15k home for example:

Security Dep (1.5x lot rent) = 650
First month’s rent = 425
Insurance = 300
Sales tax @ 6% = 900
Title Fee = 45
Total = $2,320!!!

That’s before I get a penny! So back to your idea, I’d be more along the lines of Option B, no down payment from my buyers.

I think the owner would be willing to let me find buyers as I go, and cash him out at the point each home sells. Frankly, he doesn’t have much choice – it’s going to take me probably a year to sell all these homes, so I can’t afford to lay out that kind of cash (or make payments on a loan for the cash) in the iterim.

To make a long story short, this idea may work, but I’ll have to really crunch some numbers to see what the net cash flow per month would be, and if I feel there is a large enough cushion to make it worth taking on this kind of risk. I am definitely excited to see how this shakes out, I think it’s a great opportunity for me to experience some tremendous growth.

Thanks again Psycho and let’s hear some more comments from all these unemployed investors sitting home in their Jammies (Ryan, Steve, and others who shall remain nameless).

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Re: a small thought, others may differ - Posted by bill hicks

Posted by bill hicks on December 08, 2005 at 15:19:59:

Dear Anne,

I totally agree. You maximize your potential for the absolute lowest purchase price on the park by trying to buy it now, before he thinks you can even assist him with all the vacancies. I’d say the lot rent may even need to be reduced to fill it if it truly has 150 lots not generating income. As we all know a month of income missed can never be made up. You can always raise it back up at the end of the one year lease.

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don’t think I didn’t see that - Posted by Steve-WA

Posted by Steve-WA on December 12, 2005 at 22:00:45:

git yer own!

;-)3

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Lovely UAW union? - Posted by Don-NY

Posted by Don-NY on December 09, 2005 at 10:06:55:

I thought corporations employed people and controled the economy. How can the UAW make the economy fail?

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Re: Meeting Park Owner – Need Game Plan - Posted by osupsycho (OK)

Posted by osupsycho (OK) on December 08, 2005 at 14:35:40:

Thank you for your comments. As I said the scenario was based off of some assumptions but to answer your problems.

If the payment is less than what I used then you will have to extend the length of the note to still use the sale price of $25k you stated (when one goes down another must go up). To offset this you could thus also extend the length of the loans from the investors (of course you would have to sell them on this).

As far as bad notes that is to be expected and is actually something that the pool of notes is better suited for. Because the payment to your investor is not tied to any single note and because you should be collecting much more money than you are paying out, you can take a bad note or two back and then put a new buyer in and replace the note in the pool. Or, more likely and even better, if you have another note of similar size (you aren’t going to stop doing lonnie deals are you?) you can just put it in the pool and then repo the bad note and sell to another buyer with the new note being outside of the pool.

That is the stuff about my idea but as far as your situation I would like to throw some other comments in. I think that his $10k price is a little much, especially if you are only going to be able to collect $250 payments. You would be better off going to him and trying to get the homes as cheap as possible in there current condition (think FREE). Then you can control the cost of repairs or even sell them as is if possible. This will allow you make the numbers better fit with the lower payments. You can still do the pool for investors as you will need money to make this work (pay off owner and repair/holding costs).

Sounds like a real opportunity no matter how you go.

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Re: Lovely UAW union? - Posted by JeffB (MI)

Posted by JeffB (MI) on December 09, 2005 at 13:06:21:

We have a bunch of factory workers here who make $75/hr after benefits. 3rd world countries can of course do it much cheaper. The UAW historically is quite influential in this regard. Times are changing, though.

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Re: Meeting Park Owner – Need Game Plan - Posted by JeffB (MI)

Posted by JeffB (MI) on December 08, 2005 at 15:16:37:

Excellent point about the pool of notes and pulling out the bad note from the pool and replacing it with another. I had not considered that.

These are repo homes that he is currently in the process of purchasing – he’s decided to buy ALL the repos currently in his park and has already bought out some banks inventory but not others. Trying to negotiate a package deal with each bank. I used the $10k number just as a guesstimate based on what repo homes are selling for in my area, plus his fixup which I would also assume he is getting good prices for simpl y based on the volume he is doing. This is what I like MOST about the opportunity, is not to have to do any fixup, nor manage any fixup, nor be responsible for fixup gone awry. I can show any of his homes to a potential buyer and state with confidence that plumbing , HVAC, electrical, etc have all been inspected and working properly. That’s a huge plus in my book, up here in the land of frozen pipes.

His net purchase price may indeed end up being less than 10k (again this is an average) but for the purposes of preliminary analysis I thought it would be better to be safe than overly optimistic. Thanks again for sharing your idea with us. That’s what makes this forum so great.

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Re: Lovely UAW union? - Posted by Don-NY

Posted by Don-NY on December 09, 2005 at 13:33:26:

$75 an hour? Don’t believe everything you read in the newspapers or online. That figure was quoted as $65 Just 2 months ago but $75 sounds more sensational so that is the number the media is using now. That figure Includes a lot of costs that will not go away like funding the retirement/health care costs of retired employees. If the UAW fails and union wages go to $10 an hour good luck filling your park at $425 a month. Because non union wages will be at $6 an hour for everyone else.