Mobile Home Parks: The Perfect Storm is Building for the Best Deals in Decades
Like all forms of real estate, mobile home parks have had about a decade-long run of easy financing and low cap rates. However, those good old days are over. And the result can be some of the best yielding mobile home park deals since the first trailer rattled down the interstate. Here's our weather forecast on the great mobile home park storm, and what the impact will be:
New home sales
Mobile home sales have been in a continual decline since 2000. From a peak of almost 400,000 units sold per year then, sales are down to under 100,000 today. And most of those sales are units that do not end up in parks. The good news is that, unlike the single family home industry, bad new home sales have been in every park owner's and bank's budgets for almost a decade. There is no collapse to worry about -- it's already been dead for a decade. And no sellers are trying to use numbers based on good sales that are not really there anymore, nor do you have to guess when the rebound will occur.
Few banks want to make loans on mobile home parks. There were only about 20 that did it with any regularity, and that number has dwindled down to about 5. At the same time, there has been a "flight to quality" on the part of all banks when it comes to making loans. The net result is that only credit-worthy borrowers with 20% down can get a bank loan. This is a sharp contrast to the past decade when anyone who could fog a mirror and had 10% down was able to get credit. The effect will be a buyer's market for those who qualify.
Equally important, the death of financing will set in motion even greater seller financing availability. One of the attractive parts of mobile home park purchasing has been the existence of seller carry. Now, you should see even more of it. Most seller carry offers below market down payments [giving you greater leverage], as well as below-market interest rates and, perhaps most importantly, non-recourse.
This is where the opportunity goes from Category 1 to Category 5. Only a few years ago, cap rates on parks were around 6% to 8%. Due to the lack of qualified buyers, those rates have skyrocketed almost overnight to 8% to 12% or more. And that's not even the whole story. Back when financing was easy, sellers get comfortable capping income that wasn't really there. The home that just got pulled out, the asphalt repair that was capitalized and hidden from the actual profit and loss statement; they were never really scrutinized. Today, with greater scrutiny, the income and expenses are a lot more accurate and capable of being banked on. Even if the buyer is an unaware, the bank normally lends a second, conservative opinion and reduces down the price or kills the deal.
Quantity of deals
There have never been so many mobile home parks for sale at one time. This enormous supply/demand disaster has rendered many terrified sellers into a panic mode. Sellers are stating on their parks "make offer", "must sell", and "seller will carry". This is the quintessential "buyer's market".
It's not as bad as it looks
This is the key part of the perfect storm. Although sellers are freaking out and reducing prices, and banks are shriveling up and blowing away, the mobile home park business has not really been much affected. Sales of new homes have been terrible for a decade, and every park owner has already adjusted their business.
Occupancy has remained stable at most parks for at least the last five years (many parks had a significant drop in occupancy at the start of the melt-down on new homes in about 2001). There is no reason to believe significant declines in occupancy lie ahead.
Operating costs, although feeling constant minor upticks in water and tax rates, remain very predictable and not out of control. There is no 800 pound gorilla in the expense closet.
And bank foreclosures on parks remain among the lowest of all classes of real estate. The decline in bank loans has not been due to problems with the mobile home park business model--only guilt by association with the rest of commercial real estate market.
Once in a lifetime opportunity
The perfect storm of this magnitude may not come around again. Or it may come back in a cycle twenty years from now. But if you are trying to invest and get a maximum return from mobile home parks, the time is now.
Put on your raincoat and hat, and head out into the storm, because it may not be this dark for long.