Avoiding Common Mistakes That Have a Big Effect On a Mobile Home Park’s Cash Flow

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March 15, 2016
Joanne Stevens
Real Estate Broker

 

Over the years, in selling a lot of parks and reviewing a lot of profit and loss statements, there are several common mistakes owners make that are easy to correct.

Mistake #1: Rent increases

A lot of times owners act as if below market rent is the same as earning a merit badge. It isn’t. Having under market rent loses you money every month. If the property ever goes on the market, it will sell for less and maybe a lot less. Today a tenant isn’t going to move because the rent goes up to market. Most tenants know what the rents are at other mobile home parks (often having better market rent intel than the owner). They won’t be surprised when the rent goes up to market. If the owner is doing a good job of operating the mobile home park, higher rent won’t be cause to move. When doing a rent increase, include the rent survey for your market, showing the rent charged at other communities. Also, be sure to factor in the water, sewer and garbage, if included in the lot rent. The water and sewer are probably $30–$60 per month per house- hold, depending on the city, and the garbage is probably $9–$15 per month per occupied site. If you are paying for these, consider how you may pass these utilities through. Be sure to factor in an estimate of water, sewer and garbage for the owners that pay it or the tenants.

Mistake #2: Rent Survey

What should the rent be? Not that many owners do annual rent surveys. If you have a manager, that should be their job. If there are owners of multiple mobile home parks in your market, look to their rents as a benchmark of the real rent. After all, these companies have to report earnings to shareholders or investors. They can’t succeed by charging above market rents.

Mistake #3: Holding On Too Long

When you have a park owned home that isn’t selling, it’s time to let go, and get it sold or rented. Anyone that has been in this industry for a while and sells homes knows what it feels like to have an unsold mobile home that sits month after month with no offers. You market it, keep utilities on, pay insurance and cleaning, the staff shows it countless times and nothing. It’s time to cut the price (ouch!) or do whatever needs to be done to sell the home. Each month that passes is another month of rent you’ll never recover.

The same thing is true for mobile home park ownership. Sometimes the mobile home park property looks great on paper. After you actually own it, you find it’s not your cup of tea. Maybe it’s too far away from your office, the demand for homes isn’t good, or a major employer shuts down, to name a few reasons why investors sell a mobile home park. In Warren Buffet’s 2014 Letter To Investors, he freely writes about big mistakes he made early on with Berkshire Hathaway; mistakes that might have been deadly for the company. In fact, the Berkshire company (a textile company) which became the Berkshire of Berkshire Hathaway, closed 18 years after Mr. Buffet acquired it, and he writes, “During all of those 18 years, we struggled unremittingly, all to no avail. But stubbornness —stupidity—has its limits....I finally threw in the towel and closed the operation.” Mr. Buffet goes on to say that he knew the Berkshire company acquisition “... was a mistake. Having committed much of (the company’s) resources...I quickly compounded the error by continuing to invest in a business that eventually became the most costly of my career.” If the Sage of Omaha can admit to millions of followers that he blundered, then perhaps business owners and investors should take a page out of Mr. Buffet’s playbook and cut the cord when something isn’t working, be it a park owned home OR a park.

Mistake #4: Financing

There is a lot of refinancing and new loan action today. Why? The low interest rates plus the threat of rising interest rates are the reasons. The Federal Reserve has been making noise for what seems like years, about increasing the interest rates. As the economy improves and the jobless recovery continues to dissipate, the

Federal Reserve finally raised interest rates in late December of 2015. Not all lenders are the same though, and finding a lender, whether it be local, regional or national will make a big difference in both the amount financed (dollars to you!) and the ease of the transaction.

Mistake #5: Records

Today there is truly user friendly and effective software for mobile home parks. I use Rent Manager and so do a lot of other mobile home park owners. For your own peace of mind do yourself, your accountant, your manager and a buyer a big favor, and invest in good software (it’s not that much money). A couple of years ago, I hired a property manager with no accounting background. She took to Rent Manager like a duck to water. My accountant is also a big fan. Don’t be intimidated by upping your game with great software.

 

Mistake #6: Survey, Phase I and Appraisal

Once upon a time, when you acquired your property, you might have had the property surveyed, appraised and a Phase I (California) environmental assessment done. If you didn’t order these reports, whoever you bought from may have left them in the office or the survey may have been recorded. Try checking with the county recorder or county engineer. These re- ports will save you money and time if you ever need to update them, or your heirs or a buyer require them. It’s faster and cheaper, for example, if the land surveyor has an existing survey to start with.

Mistake #7: Water and Sewer

Please do something about this, both for your cash flow and the environment. These pesky leaks can be tough to find. Some of the large owners use American Leak Detection (Google it —they have regional offices). They are not cheap, but they will find your leaks and fix them. Water leaks are expensive; it is money you won’t ever recover. One time I sold a mobile home park where the owner knew he had a water leak to the tune of about an extra $2,000 per month. This was a small mobile home park. When he sold the park, a condition of the sale was to find the water leak(s) and fix them. By then, he really wanted to sell his park because his company (not the mobile home park business) was growing and the business re- quired his full attention. The upshot was that after losing at least $40,000 in water costs he hired two companies (the first company didn’t find it) about $3,000 to find the leak and another couple of thousand for the second company to fix the leak. The moral of the story is that you will never get back the wasted water bills, so it’s best to bite the bullet and find and fix the leaks. ■

Joanne Stevens is a real estate broker specialist in listing and selling mobile home parks and manufactured home communities throughout the U.S.

She can be reached at 319.378.6785 phone; 319.365.9833 fax; and email: joannestevens@ joannemstevens.com

This article was recently published in WMA's February 2016 "Reporter".  MHCO would like to express our deep appreciation to WMA for allowing MHCO to upload this article to MHCO.ORG.

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