Blog Posting # 601 @ 4 Sept 2020; Copyright 2020. Educatemhc.com
Perspective. ‘Land lease communities, previously manufactured home communities, and earlier, ‘mobile home parks’ comprise the real estate component of manufactured housing!
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‘One of the Most Risky Business Transactions in the Manufactured Housing Industry’
Buying & Selling Land Lease Communities
Acquiring a land lease community (formerly, manufactured home community) as a real estate investment? You familiar with the numerous touchstones to examine, document, and plan during the pre-closing due diligence period? Thinking here of ‘good & bad’ relative to property location & street layout; number, size & functionality (i.e. whether functionally obsolete or not) of rental homesites; and the type & condition of property’s infrastructure, where utilities (above & below ground) & streets are concerned. And the list goes on, including careful due diligence examination of property’s ‘financials’, where accounts receivable & payable are concerned, along with staffing considerations past, present & future.
For many years, as a long time land lease community owner/operator and freelance consultant, I offered Mystery Shopping and ‘pre-due diligence inspection services’ to novice, or first time buyers. Unsure anyone active in the real estate asset class does this, other than EducateMHC, now that I’ve withdrawn from active professional property management.*1 So, for the most part in this blog, I’ll share touchstones and techniques which highlighted pre-due diligence services over several decades.
Marketing and selling one’s land lease community, as a real estate investment, is as tricky as the acquisition drill; but here, in my opinion, potential pitfalls have more to do with real estate contract terms than almost anything else. While these comments apply primarily to sellers, most also have an application to buyers as well. Examples:
• Whether to use a real estate broker or not – and if so, who or which firm? Given the popularity of land lease communities, as investment vehicles these days, one might consider using the services of a local, or near local, real estate specialist attorney, to protect one’s interests! How to market the property? Tap into inquiries received during the past six or so months. And, once the word is out, the property is on the market, you’ll receive plenty of additional inquiries. Bottom line? Whoever leads, or is part of your marketing team, must be protecting your pecuniary interests from start to finish! Now, if you know (well) a regional or national broker who specializes in marketing land lease communities, this might be a wise choice to consider.
• Pricing one’s property, with and without park-owned homes in place. These days, a land lease community-savvy real estate appraiser is probably your best bet – not necessarily the broker who maybe ‘promises you an exceptionally high offer’, to get your attention and listing. Valuing homes on-site (again, park-owned homes) is an especially touchy subject. For example, will their value be based on income- producing potential or replacement value (e.g. NADA blue book or programming)? Sellers generally prefer the former; buyers – to keep values low – generally prefer the latter.
• Do property listing and sales contracts protect your interests or those of the listing broker (brokers) and or buyer? How to tell? Several ways, but one of most ‘telling’ is the existence and nature of ‘escape clauses’ contained therein; i.e. Can you get out of the ‘deal’ easily, or have to forfeit any deposit you may have accepted to take your property off the market? And for how long are you locked into the listing contract? 30, 60, 90, 120 days or longer? Generally, ‘the shorter the better’ unless the property has issues.
• Cash or contract sale? An old Rule of Thumb: ‘You can control the price or the terms of the deal, but not both!’ Meaning: Cash sale = less $ at ‘closing’ (i.e. via bank loan) with no risk of having to take the property back in foreclosure. However, more $ at ‘closing’ with contract sale, but be vigilant on terms ensuring they protect the seller in the event of loan default. Seriously. Happens more than most folk realize. For a list of 20 lenders and brokers who specialize in land lease community loan origination, refer to the EducateMHC Resource Document: ‘National Registry of ALL Lenders’.*1
• If a contract sale, and buyer has other land lease communities within 100 miles of the subject property, visit them to observe how well or poorly the buyer manages them. Best indicator of what to expect for the property you’re selling.
• A final bit of advice for now. Be aware of, and beware, buyers who immediately accept your offering price or value. While maybe legitimate, know there have long been buyers who use this ploy: Agree to pay higher than justified sale price, then wait out the due diligence period, with little or no property and accounting inspections and demands. Then, within a week or so of ‘closing’ make demands on seller to lower the sale price and or correct deferred maintenance, and worse, capital expenditure shortfalls ignored to that point. All too often this work!. Why? Sellers often plan their post-sale lifestyle changes, have told friends and family of the pending transaction, and otherwise – mentally ‘walked away from the property’, not wanting to start the process again.
Some of the touchstones I, as a pre-due diligence consultant, considered during the review of documentation provided by property owners and or real estate brokers, to our clients who were potential buyers:
• Ensure buyer knows what he/she wants to buy and has the ability and capital to effect a land lease community transaction. Examples: OK with 50% (turnaround challenge) or must have 100% physical – and economical occupancy? Prefer public or private utilities on-site, e.g. water, sewer. Low or high site density, e.g. five or 15 homes per acre? Accept functionally obsolete rental homesites (too small for siting of contemporary manufactured homes) or not? And how far/close to buyer’s home or office must the property be?
• Research and visit local housing market to get ‘feel’ for the property proper, employment opportunities in the area (unless a retiree mecca), quality of education, and presence of shopping, hospitals and other services. Good place to start is local Chamber of Commerce and their handouts.
• Visit www.zipwho.com to learn the Area Median Income (‘AMI’) for this local housing market (property specific). This will assist in learning what housing price points, from ‘risky’ & ‘affordable’ perspectives, ‘work’ in this location. To that end, you’ll need a copy of the ‘Ah Ha! & Uh Oh! Worksheet’ to work through those numbers.*1
• Consider making Good/Bad Unchangeables & Good/Bad Changeables lists for the subject property. Max number of good Unchangeables (e.g. location, density, utilities) is Good. However, bad Unchangeables are ‘warning’ signs. If aligned with buyer’s goals (e.g. turnaround challenge is OK), max number of bad Changeables (lack of rules enforcement, poor collections, lousy resident relations, etc.) is a Good indicator; otherwise, buyer may want as many good Changeables as possible. Hint: Almost all ‘Changeables’, good and bad, are property management-related, so begin there.
• Take time to perform a SWAT Analysis. On an 8 ½ X 11 inch piece of paper make a vertical line from top to bottom, and midway down the page, a horizontal line from side to side. Then, top left corner, label as STRENGTHS (now). Top Right corner, label as WEAKNESSES (now). Bottom left quadrant label as OPPORTUNITIES (now & future), and bottom right quadrant label as THREATS (now & future). That way, as you review local newspapers, talk with the property owner and other resources, learn and categorize the Strengths, Weaknesses, Opportunities, and Threats, relative to this property. And plan accordingly.
• Ascertain whether present rental homesite rate is in sync, or not, with other types of multifamily rental properties in the same local housing market. Two steps: First, ascertain local monthly rent rate for conventional garden style apartment communities in the same area, especially 3BR2B units….comparable in size to manufactured housing. Take that average (e.g. $900/month) and divide by ‘3’. Answer = $300/month for land lease community target site rent for transaction property. Is offered property above or below that amount? First acid test. Step two; compare subject property rent with other land lease communities in the area, to see if there’s room for ‘lift’ after ‘closing’, or is rent already above market, restricting buyer’s options post ‘closing’?
• At some point during this sequence of touchstones, perform a ‘Cash Flow Analysis’ of the property’s operations, using the ‘MHIndustry Standard Chart of Accounts’ for Land Lease Communities, along with the Operating Expense Ratios (‘OERs’) contained therein. Use a Cash Flow Analysis form that allows you to list the ‘present performance $’ side by side with ‘future performance $’ based on changes anticipated for the property post closing.*1 Know that the national average OER for land lease communities continues to be 40+/-%, according to the 31st annual ALLEN REPORT.
OK, the transaction appears to be headed for consummation or ‘closing’. What now? Prepare a Management Action Plan (‘MAP’) based on one’s visits to the property, Cash Flow Analysis, SWAT analysis, and lists of Unchangeables and Changeables. Even Mystery Shop the property, by phone and in person, to evaluate the present day staff’s job performance. When preparing the MAP, be sure to include a completed Takeover Checklist, and Property Information Sheet (e.g. vendors, phone numbers and more). All these helpful materials, and more, are included in the nearly 200 page textbook: Community Management in the Manufactured Housing Industry, available from EducateMHC.*1
Two concluding tips. When first entering a new local housing market, when evaluating a land lease community, attempt to locate an independent (street) MHRetailer. Playing the role of a would be homebuyer, ask for names of best and worst properties in the area. If subject property is not mentioned, ask about it. Also ask for a list of all communities in the area. Next. When driving on-site for the first time (in an older vehicle, and dressed casually) stop and ask a resident what the site rent amount is, how it’s paid (on-site, mailed or electronically), and what he/she likes and dislikes about living there. Answer to the second question will usually unearth issues that will likely play into negotiations to purchase the property.
End Note. 1. To contact EducateMHC, visit www.educatemhc.com or Erin Smith, MHM, via (317) 738-3434