The Tin Can Man?! vs. Floor Plan Man? - Posted by David Butler
Posted by David Butler on July 22, 2006 at 16:39:23:
Hello Larry,
Thank you very much for your kind comment. The fact that Tin Can Alley is still generating this kind of response is very heartwarming, and continues to be a source of ongoing satisfaction and inspiration for me. So… much appreciated!
As to broad question regarding the MH note industry… these types of open-ended questions are very difficult to play with, because they put the onus of trying to figure out what the poster wants, squarely on the shoulders of the respondent. That’s a tough spot to be in, most of the time, particularly because we tend to answer to briefly, or run on forever. (I’ve been known to be prone to the latter :-(… )
But I’ll try to take a stab at it, at least for openers… then we can see how this thread progresses from there… fair enough?!
Okay… to begin with, I just purchased five more MH notes, in two separate deals. Like always, the deals have been much harder to close than they ought to be. Much of it is a result of the casual, and often lackadaisical manner in which many on the “supply side” of the MH business operate - be it park owners or staff; dealers,Lonnie dealers, and/or occasionally state agencies involved.
Title work and lien perfection issues are a constant problem in these deals. So that five-day closing we planned on having - often becomes three, four, five weeks long. I’ve had some run out to almost three months. Throw in the historical perspective of fraud and/or mismanagement in the industry… well there you have it! And it has gotten worse over the past few years, as more “Lonnie” type dealers have moved into the business.
Many of these folks don’t know Lonnie Scruggs, or read his books… much less realize they are doing the same thing. And that’s unfortunate, because rather than practicing the sound business methods Lonnie teaches in his MH investing courses (we constantly have to remind folks that Lonnie’s courses are about buying and selling the actual mobile homes, NOT buying and selling privately created NOTES merely SECURED by these homes) many of these folks have instead copied the same bad habits that have always plagued the mainstream manufactured housing marketplace.
(see Lonnie’s “Deals On Wheels” http://www.creonline.com/catalog/scruggs.html
and “Making Money With Mobile Homes” http://www.creonline.com/catalog/b-106.html )
There are a lot of bad actors out there… in MH finance, MH retailing, MH installation, MH Park owners & managers, both in new and used homes. And many Payors lack much in the way of the FIVE C’s (character, capacity, capital, conditions, and collateral) with
character lacking being the most debilitating. Not surprising, given the unethical abuse so many of them went through in the process of buying the home in the first place.
But… bless those little beasties, I still love them - and the market still keeps generating them.
At the same time, I want to mention that your question doesn’t differentiate, much as the private note industry doesn’t make clear in its advertising, that from a practical standpoint - notes secured by MH/land packages are technically real estate notes, not mobile home notes. Many private buyers do the same thing (“We buy MH paper”) when they mean - “We buy real estate notes on improved real estate, including MH units”.
As pointed out extensively in TCA, the retail MH marketplace has a very spotty, and highly cyclical history, particularly with regard to new home production, and the financial pipeline across the board (new and used). The most recent down cycle has turned out to be the worst, and most prolonged, in the manufactured home industry’s history. This is housing?s WorldCom.
Manufacturers, lenders and retailers are blamed equally for encouraging reckless subprime lending that busted the industry, dispossessing thousands of homeowners, sinking many retail dealerships, and knocking roughly three fourths of the manufacturer’s existing in the
late 1990’s completely out of business now.
Strangely enough, or perhaps not, given human nature, the retail MH marketplace’s troubles were so publicized from the outset of the latest crash back in late spring of 2000, that everything MH went sideways in the minds of most investors. In the private side of the equation, major institutional buyers even backed off from notes secured MH/landcombos (there never have been “regular” institutional buyers consistently purchasing notes secured by “freestanding” MH located in MH parks - and essentially NO buyers for notes secured by “freestanding” MH located on land or lots not in parks).
That has slowly started to correct itself, and MH/Land Combo notes are coming back into some favor to real estate note buyers. In the meantime, the niche both Terry Vaughan and myself tend to operate in - purchasing notes secured by “freestanding” MH located in MH parks - has always been the “step-sister” in the private cash flow industry.
Though a wonderful niche sector, its never really had a strong enough pipeline to be considered “the MH note industry”, per se.
Though all of us who have operated in this sector over the past 10 years have seen out share of “spot” buyers (smaller regional banks, pension funds, insurance companies, and thrifts) that would purchase portfolios of these notes in ranges of $300,000 to $1MM, these have grown very few and in between over the past few years.
In the meantime, the niche has chugged along, being facilitated by the main players that continue to look here to invest. These buyers are characterized as generally being local folks, who purchase anywhere from two or three notes a year, investing maybe as much as $50,000 to to those of us who have expanding geographically, but don’t purchase more than $300k to $500k of MH paper in a single transaction.
Terry and I have both helped create and develop some of these buyers - who sell to us what they can’t buy, and keep for themselves what they can. We even have students who purchase MH notes locally to where they operate, and then sell partials to us, in order to recapture some or all of their capital.
In fact, a couple of the most successful of these fellows, including Phil Camenisch and Matt Kominiak, will be assisting students at the two-day “Profiting In Mobile Home Notes” Workshop Terry and I will be presenting at the Renaissance Flatiron Hotel in North Denver area on October 21st & 22nd.
http://www.creonline.com/cashflow/wwwboard3/messages/21148.html
Despite (or perhaps more accurately - " because of" ) its spectacular boom-bust cycle of the nineties, culminating in today?s historic production slump and repo glut, our niche is still thriving. Going forward, it remains to be seen how much room we will have in the long-term future (beyond the next five years).
Manufactured homes have slowed to roughly 6% of annual housing sales, from a high of 20% through the latter 90’s. If that trend holds, this means less homes being put into the marketplace to become future resales.
But, until then…
The changes one could add to Tin Can Alley at this point are that: the three-to-five year window for huge gains has been extended, and should likely play out further, due to the fact that it runs counter to prevailing trends in stick-built housing starts, as well as with interest rates in the mortgage markets that finance those stick-built homes (when rates are low, MH sales slower, when rates are high, MH sales tend to increase).
Also, the surviving MH builders have become more focused on the “modular” home side of their production, and less reliant on the “HUD-Code” or “off-frame” housing that makes up the bulk of the property that secures the notes in our niche.
Another change is that investor yield requirements in general have risen across the board, and there is much less willingness to purchase C & D grade paper.
Assuming, as a lender (or in our case, a “Note Holder”) you not only want to get all your principal back after loaning out money, but you?d like to see at least 10 percent interest as well, MH chattel lending may not be for you.
Think about this: The performance of chattel loans over the past eight years or so has been so dismal and disastrous, even Bill Gates? fortune would have been endangered had he invested in MH ABS securities instead of Microsoft. Lucky him?
With many things remaining on this industry?s plate to be resolved, let me assure you chattel lending or note buying is not for the faint of heart. At present, only severe discipline in loan note buying ? avoiding lower credit tiers and many in-community loans allows for lender or note holder survival. Lower credit tiers and in-community placements have experienced devastating loan losses in the last eight years.
But avoiding the two has resulted in severe volume restrictions for the traditional markets too. Our industry is not a 70 FICO business (though I am pleased that yesterday I just sold an MH I had to recently take back on a defaulted note, and picked up a home buyer with $6,000 down on a $24,500 purchase, and a 700 fico!!!) and lacking good in-community chattel placements severely constrains resales and demand.
Chattel lending hangs on by the skin of its teeth. But on our side, as I point out in great detail in Tin Can Alley… we have the luxury of underwriting the paper after getting to look at how well it has performed, and discounting and/or using “structured purchase”
techniques to help modify the hugely higher risks associated with this kind of paper!
Now… the one thing Tin Can Alley was built to do, it did not achieve. The marketplace is still terribly weak in terms of having note finders (or note brokers) who do anywhere near a competent job of gathering critical and relevant information about the paper
they are trying to sell - or take any kind of control over the sellers they work with.
So we still see tons of crappy paperwork flying around, with nobody able to answer critical questions about the notes, and spreadsheets that take to dang long to work through and clean up… just for the pleasure of then working through them again to actually make a bid??? xo.
Alright… now I’ve finished this “novelette” I’ve got to start on that project I has scheduled for an hour ago! :-))))
But hope this helps… and I know I speak for Terry too, when I say - can’t wait to see a nice package of notes hit my desk… with your name on it! 
Have Fun For A Living and a Lust For Life!
David P. Butler