Overheard.

The following is a “conversation” with the developer of a newly built family m/h land lease community. It is a compendium of conversations with many developers across the USA, who find their projects floundering under similar circumstances.

Reporter: Good afternoon, we understand you have just deeded back your newly built m/h land lease community to the bank. Our readers are interested in what happened. Will you explain?
photo 5Developer:  Basically, we just couldn’t make the monthly loan payments from home-site rentals. We just didn’t fill the sites fast enough. And, all that income we planned on making from retailers and later from home sales, never materialized.

Reporter: What kind of market research and project planning did you do?

Developer: In retrospect, apparently we didn’t do enough. After all, how hard could it be to build a “trailer park”? We saw our efforts as primarily as solving construction related issues, and not marketing related ones

We have seen other area communities in the past fill at reasonably fast rates, and we thought we had similar circumstances. At least they were fast enough to offset expenses and interest charges until the “break even” point was reached. In retrospect, these communities were built at a different time, under different market conditions.

We didn’t really understand the market in terms of available housing options for our target buyers, who they were, their income levels, or where we were located with respect to employment centers, etc.

We thought by offering a “better quality” home in a “nice community” we could create a new demand for manufactured housing, by taking away the older style and trailer park appearing home. We found out it is not necessarily true that even with a substantially higher price, more buyers would buy our “better looking” homes. Most home buyers we were talking to just wanted a lower priced housing alternative than were being offered by builders of entry level site built homes.

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Reporter: What was your price point?

Developer: When considering the combination of monthly lot lease payments and home payments, the total was only a few thousand dollars less than a home buyer would pay for a new entry level site built home, but we had more features, a larger home, and generally were a better value . . . .we thought!

Reporter: And . . . .
Developer: When interest rates dropped through the floor for good credit buyers who were buying entry level site built homes, we were left with trying to quality marginally acceptable credit buyers.

Reporter: Why was that a problem? Wasn’t there financing around for m/h on leased home-sites?

Reporter: Didn’t you plan on a slow initial fill rate, by pre-marketing, and pre-leasing home-sites?

Developer: No, we were just too busy getting our development financing in place, and hiring a general contractor. Construction problems and delays took most of our time. Since we believed our homes and community were going to turn out so nice, that the “world would beat a path to our door”, we de-emphasized pre-marketing the project. Early on, we knew there was the possibility of a slower than necessary fill rate, and we didn’t have enough cash reserves going in to support expenses and interest, so our strategy was to make a profit on the home sales to offset initial negative cash flows.

Reporter: Well, what happened?

Developer: First, we tried to get the local m/h home retailers to put homes in the park, for a fee. It was this fee that was supposed to offset a part of our operating costs and interest expenses, until the break even point. Although when we were planning the new community, they gave us assurances they would support us, the support never materialized. To date, they have only put a few homes in here.

Reporter: Why do they say they are not selling new homes into your community?

Developer: Well, most of them say they don’t have any buyers who want to pay monthly rent for siting their home. They say buyers only want home/land combinations where they can get a long term, low interest loan.

Reporter: Did you help them with your marketing program, buy providing them with information on the many advantages of leasing a home site vs buying one?

Developer: No, we assumed the local retailer’s sales staff knew the differences and although we certainly didn’t expect to get all the home sales, we did expect that they would be able to convince a number of buyers living in a nice land lease community has it’s advantages. What we found out was: not a single salesperson in our area knew how to sell living in a land lease community, and didn’t think it was a good idea in their opinion. Now, I ask you “if the sales person doesn’t believe in it, how can he sell it to the buyer”?

Reporter: What did you do then?
Developer: Next we decided to go into the new home sales business ourselves. We made a deal with a home manufacturer, although several wouldn’t sell to us because of a “local retailer conflict”, and set up a model home center.

Reporter: How did that go?

Developer: Not very well. It took us much longer to get the model center set up than we thought it would, and the expense of furnishing and landscaping the homes was much higher than we thought. We lost about 3 months during this time. And, we found out that although we could get credit lines for “floor plan” financing of the model homes, we had to put up cash for home installation, furnishings and landscaping.

Reporter: After you had the in-community model center up and running, did you start getting a good flow of prospective home buyers?

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Developer: Not until we spent a lot of money on advertising. We didn’t think we need an expensive advertising firm, and could do it ourselves. It took a long time for us to figure out what media to use, when to use it, what kinds of ads to create, and how to motivate them to come to our sales center. When we finally got come good traffic to our site, we had lost another 3 to 4 months.

Developer: Originally, lenders were willing to finance buyers with 5.0% down payments and credit scores from 550 to 580. So, the relatively high interest rates those dates were not a problem, because they would qualify to buy a new home, and that was the most important. Later credit scores were raised to 620 to 630 or more, and although interest rates for site built entry level homes were dropping, chattel mortgages remained relatively high.

We found that virtually the only buyers we were seeing in our model center were poor credit risks. We weren’t getting credit approvals on more than 5% to 6% of our prospective buyers. Why would a credit worthy prospective home buyer want to buy a m/h in a land lease community when for the same down payment, they could buy a new entry level site built home?

Reporter: Were there any other financing options available to you?

Developer: At one time, we had hopes that the new Freddie-Mac land lease financing program would be offered in our area, but problems with state title laws and long term leases eventually effectively killed the program. The cost of their required foundation systems added greatly to the overall price, putting at the same level as area entry level home prices. In addition, we found our lender wouldn’t allow some of the required documents to be recorded as property liens on the public records.

Reporter: What would you recommend to a new community developer?

Developer: a) Know your market, including evaluating other area housing options. Do the research. b) Use the demographics in your evaluation. c) Take a look at all competitors including how/where they advertise, home pricing, fill rates, available home buyer financing, etc. d) Objectively evaluate your project as a prospective home buyer would: in the context of other area housing options. e) Don’t overprice your homes, thinking if you make them nicer, you will necessarily attract more home buyers. Price your homes so that the combination of monthly home site lease payments and home payments are at least 20% under those of a buyer purchasing an entry level site built home, or are at the local area rents for a 3/2 apartment f) Make sure you have adequate home buyer financing. g) Assure adequate working capital to offset initial expenses and interest costs. h) Consider building an age 55+ age restricted community where viable home financing is not as much an issue.

Reporter: Thank you!


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