California’s Newport Beach has always been an expensive place to live. I’ve always wondered where all the service people and employees live who work for the residents there. On evening I asked a waitress where she lived and she mentioned a locale about 10 miles away. When I asked her whether she owned her own home, she proudly affirmed that she did, and “it’s a double-wide”. She went on to explain that her payments were only $460 per month PITI on a lot/home package that totaled $54,000 at 17% interest.
I did the math quickly with my trusty HP-12C. Excluding HOA fees, taxes, insurance, etc. the interest alone should have come to about $765 per month. When I pressed her for more details, here’s the amazing tail she told me:
The unit itself was priced at $32,500. It was being bought for nothing down on a fully amortizing 15 year Note that called for the full $475 payment she was making.
The land was being bought on a separate Note for $22,500. It too was written at 17%, but the interest would compound and accrue monthly to the principal owed for 181 months at which point the first payment would be due. This would be the month after the home had been completely paid off. The amount of principal at that time would be $283,049. When I asked her how she expected to pay this Note, she said that she didn’t know, but in the interim, she’d have a free and clear 15 year-old mobile home to live in, even if it had to be moved to another location.
Stop and think a moment how brilliant this is: At the point of inception, the cost of a fully developed lot was about $8000 and the mobile home could have been bought for about $14,000 at the factory.
If it had been an all cash investment by the seller, this $22,000 investment generated a 26% annual yield, but he had borrowed the money he needed from a pension plan at 9% on a similar 15 year Note; so his payments were $223.14. Not only was he paying off the lot, but also generating $252 per month. He had over 100 of these deals.
At the end of 15 years, all the number could be adjusted upward to current market interest rates and the process could be repeated.
In the interim, he was exempt from all of California’ s landlord and tenant laws, mobile home community regulations and restrictions, the need for repairs, insurance, or property taxes.
From the buyer’s standpoint, there was absolutely no competing rental space, whether house or mobile home, at the monthly price she was paying, so no matter whether or not she could complete the purchase of the lot by refinancing the entire package later, she was still cutting her costs of living considerably. Nobody was getting hurt.
