Why am I having such a hard time finding a suitable investment grade m/h land lease community? Don C., Midland, TX
There are many more buyers than sellers of m/h land lease (M/HLL) communities right now, and it probably isn’t going to improve in the near future, so you can expect a lot of competition. It’s no secret anymore that investing in M/HLL communities, at the right price and good financing, can be one of the most lucrative and safe of all the real estate investment opportunities. With so many buyers and so few communities for sale out there, it’s a seller’s market. Not only is there a lot of competition, there is also an on-going decrease in inventory created by changes in land use for older communities in areas where the underlying land may not be at its “highest and best”.
Community owners in areas which have grown up around them, find themselves being offered prices which may be many multiples of it’s value as an M/HLL community. In many states, where there are no “penalties” for displacing residents in these older communities, the financial pressures to sell are too much to pass up. And, there are fewer and fewer new communities being built due to lack of good chattel mortgage financing for home buyers, difficulty in finding land with entitlements or obtaining entitlements for a site, and the very low interest rates for site built homes which is siphoning off apartment residents with fair to good credit, that previously would have been good prospects for a land lease community.
With all the competition out there for investment grade communities, what is the best way to find something to buy? Autumn F., Baltimore, MD
If you are lucky, you might find something on the Internet, or from an advertisement, but it isn’t likely, unless you are willing to purchase something which has been “picked” over by more knowledgeable buyers. This means considering buying something which they don’t want: communities with on-site utilities, those with high numbers of rental units, smaller communities, communities with high numbers of vacancies, etc. Remember, the REITs and major m/h community income property investment companies out there have full time staff “dialing for dollars” continually of most all the known investment grade communities, and you are “in competition” with them.
Often using the services of a knowledgeable and experienced agent as buyer’s broker can result in finding communities which may be worth purchasing. Buyer’s agents have several ways to find communities, starting with making direct contact with the owners. They also may use their network of associates which may have communities which are not generally available to the general public. Some buyer’s agents have proprietary methods of obtaining listings on communities, which may not generally be available.
See: www.mobilehomepark.com for more information on evaluating the value of a community.
How do I evaluate the income from a m/h land lease community I am considering buying? Vince C., Santa Barbara, CA
Many sellers include all the income from a property including income from home rentals, home sales commissions, etc., when showing N.O.I. (Net Operating Income) to a prospective buyer, but all income shouldn’t be treated the same. Be aware that some sellers understate the income, by pocketing some of the cash which they may receive from residents. Cash which won’t show up in the bank account or in their financial records. A careful analysis of the rent roll, and leases, should uncover this type of discrepancy. Most knowledgeable buyers evaluate income from site leases as much more valuable than which may come from other sources such as home rentals, home sales commissions, etc. In fact, most institutional and conduit lenders will only count income from site rentals, and in some cases, will not even finance a community which has any more than a few rental homes.
What expenses should I consider when evaluating a m/h land lease community as an investment? Wayne C., Montgomery, AL
An honest seller will show you a copy of a tax return or a detailed financial statement showing all income and expenses for the last 3 years on the property. Even then, you have to be aware of several changes which may occur after closing:
- property taxes may, and almost always increase
- liability insurance may, and almost always increase, and
- you may have to add investment management fees and maintenance reserves to the stated expenses to properly evaluate it’s value.
Many sellers, especially those of smaller communities, who are also the manager of the community many not show a manager’s salary, and often minimize any maintenance costs which may have been expended on rental homes if any in the community.
What financing options are available to me when purchasing a m/h land lease community? Drew R., Atlanta, GA
If the community is investment grade, and will support a full time manager, investment management fees and maintenance reserves, with off-site water and sewer utilities, and few if any rental homes, it may be a candidate for a low interest loan which may be provided by a “conduit” mortgagee. These loans may have a minimum size, and may contain a “defeasance” clause, which in effect may make an early payoff expensive. Local banks are a good source for financing. Both these types of loans currently are at all time low rates, and terms, and provide for from 25 to 30 year amortization. In some cases, conduit loans may be as little as $700K, for qualifying properties.
Communities may also be eligible for financing under the FHA 207m program, if there is qualifying rehabilitation involved at the time of acquisition. This program provides for funding at 90% of the appraised value, using a 110% debt service ratio on N.O.I. and a 40 year amortization, at a low fixed rates. Income from home rentals or homes sales commissions are not included in the N.O.I. calculation, and the expenses must include an investment management fee plus maintenance reserves. Statutory origination fees are relatively high at 3.5%, but the loans are non-recourse to the borrower, so in the event of a default, there is no deficiency charged against the owner. Most lenders have a minimum of $1.5M for this type of loan, but virtually none will go lower than $1.0M.
For existing M/HLL community owners, funding may be obtained for any existing recorded, and un-recorded, debt plus 90% of the rehabilitation costs, and most fees.
Edward “Eddie” Hicks
Since 1963 as m/h retailer, manufacturer, and developer.
Licensed R.E. Broker
Licensed Mortgage Broker