Mobile homes are overlooked by all but a few people in the equity business because they don't perceive them as offering opportunity for profit. Now that the paradigm is evolving from high short-term profit opportunities to long term buy-hold gains, mobile homes offer yet another way to adapt to the changing market. I've been involved with mobile homes as long as I've been buying houses. For the past few years, the greater portion of my annual net income has come from them. This month, we'll review some of the ways that big profits can be made with individual new and used mobile home units, mobile home lots, and mobile home financing. You may be surprised at what you've been missing.
Manufactured housing is a catch-all term that encompasses a wide variety of housing products; the most familiar being mobile homes. As with houses, mobile homes come in all shapes, sizes, and price ranges. Unlike houses, most mobile homes sit on land that the owners rent. This land can consist of separate lots, rental lots that located facilities that range from basic mobile home parks to elaborate five-star mobile home communities, to rented mobile home lots in cooperatives that are owned by the residents. As manufactured homes become larger and more elaborate, they become almost indistinguishable from stick-built houses. They feature deluxe built-ins, wood accented taped and textured bull-nosed dry-wall interiors, and love tubs. They are often situated on occupant-owned residential lots in manufactured home communities that are organized like a Planned Unit Development (PUD).
At some point, mobile homes shed their wheels and axles, sometimes gain a second floor, and are trucked to their ultimate site. Because of economies of off-site construction, manufactured housing can be assembled at very competitive costs into condominium and apartment units, townhouses, schools, churches, prisons, motels and, in the case of Reno's renowned Mustang Ranch, even a brothel. The more closely a manufactured home resembles a stick-built house, the easier it is to finance. A mobile home situated on an approved foundation can be financed to an occupant with a high credit score for 30 years with as little as nothing down.
The virtually limitless variety of choices with manufactured housing opens up myriad possibilities for profit seekers. Let me sketch out a few starting with the small investor, then move up the ladder to larger investors: Lonnie Scruggs has spoken at both our Mobile Home Mania events. He has written two books on the subject (“Deals on Wheels” and Making Money With Mobile Homes”). He focuses on bottom end, single-wide, older fixer-upper homes; many of which were build before 1976, and thus aren't eligible for HUD financing.
There are a lot of these homes. I've bought them already set up in parks, and have paid as little as $800 for a single-wide that needed a complete overhaul to as much as $4000 for a ready-to-move-in water-front home. When you consider that a water-front home in California recently sold for upwards of $1.8 million, the $4000 price I paid was probably not too high; but price should be determined by the use to which a home will be put, and by the yield expected on the investment.
There are essentially three choices in Lonnie's market: (1) Buy, fix-up, and sell with seller-financing; (2) Buy and rent on a “Rent-to-Own” program; and/or (3) Simply rent for cash flow. An entrepreneur can just about double his money when a home is bought, fixed up, and sold. Conversely, it's possible to generate almost that much profit per month. Here's an example: The $4000 waterfront unit in pristine condition mentioned above was situated on a rented lot in a park. It rented for $500 including lot rent. The monthly $200 lot rent covered water, sewer, lawn maintenance, and garbage pick-up; leaving $300 for me. I kept about $250 of this after paying for management and maintenance, etc. Thus, I was receiving $3600 per year on my $4000 investment. That's 75% annual yield on my investment.
EXPLOITING LOCATION AND FINANCING FACTORS
About ten years ago, I made the front page of the Orange County Register when I said that I could buy a home in Orange County, California within one day for under $60,000. I did. This house was in a mobile home park in Placentia and the price was $28,000, not $60,000. It had been there all along, but investors didn't have their sights on mobile home opportunities. They still don't. That means with very little competition, homes are still easy to buy, and to sell; but you have to learn something about the business first. Here's a quick tour of the fundamentals:
Location and financing control mobile home profits more than any other factors. There are plenty of lenders for new mobile homes that have been moved from the factory to the dealer's location, and from there to the final site. From that point on, in general, financing becomes harder to get; especially for single-wide units. This is bad news for the owner when he tries to sell it, but good news for cash buyers and buyers and those who need to buy with seller financing. On the one hand, cash buyers can drive a pretty hard bargain. On the other hand, the buyer who needs seller financing can usually find it with used units on rented lots.
From time to time an unexpected scenario plays out when a unit is bought in a park; particularly when the park has several vacancies. The park manager knows that when a unit moves out, it may take months to fill the vacancy thus created. He's often a lot more flexible than otherwise. I've seen managers offer free lot rent for as long as it takes to re-sell a unit. This is money in the bank when a unit can be rehabbed and re-sold in place. It can cost as much as $3000 to move a single wide to a new parking spot, and to set it up. When you consider tear-down, transportation, and re-assembly, a double-wide can be many times as much plus.
Being able to leave the unit is place and avoid paying lot-rent can really boost profits. The benefit to the park owner is that he'll have a more attractive unit in his park to enhance its appeal, and he won't have to fill another vacancy. Sometimes this manager-flexibility translates into a bending of park rules against rentals to allow a unit to be rented, or sold on a rent-to-own arrangement. It opens up possibilities for buying units and paying for them by leasing them back to sellers for little more than rent credits. Here's a case in point:
Fred was an elderly retired Navy cook who lived in an older double wide mobile home. He didn't have enough money to pay for needed repairs plus his $150 lot rent, so he had just let his unit go. His kids wanted him to live with them, but he clung to his independent life-style. His unit in as-is condition was worth about $3000 including needed repairs. He signed over the title to his unit to the park handyman who agreed to complete the repairs and to pay half of the lot rent for the next two years. That gave Fred a much better place to live, plus an extra $75 per month in saved rent for two years. He knows that he'll have to go live with his kids when his time runs out. The repairs cost $600. The rents cost $1800. The buyer should be able to easily sell the fixed up unit for $4995 with seller financing after Fred moves out; or net $250 per month from rents, if rented.
There is another aspect of manufactured housing that is often overlooked; renting new `park units”. A park unit is usually about 14X30 with 1 bedroom. It is designed to be set up in a permanent seasonal vacation spot such as Florida during winter. Once set into place, these rarely move and stay empty most of the time. One small RV park owner found a manufacturer who would sell, deliver, and set up new park units for about $16,000 each. A new units, they could be readily financed.
These 1-bedroom park units are too small for families, but are ideal for singles and empty nesters willing, able, and ready to pay $500 per month to live in them on a year around basis. By combining annual rents from these units with seasonal lot rentals, he has been able to smooth out his income, and build up his average paid occupancy in the process. Little by little, out of cash flow, he's gradually increasing his annual income by converting his RV park to a high-density residential park that appeals this special segment of the market.
MOBILE HOMES CREATE A UNIQUE DISTRESS MARKET.
Outsiders often relegate mobile home living to, as one wag put it, “the newly wed and nearly dead”. There may be some truth in that, but many families are attracted to mobile home living by the idea that they will be owning their own homes with affordable payments. They also like living in a controlled environment such as an upscale park can provide. Others like to dwell apart with their units parked on rented lots rather than in parks. In either instance, mobile home owners make two monthly payments; one to the lender and one consisting of rent to the owner of their lot. When they become overextended, they often skip both these payments. This leaves two unhappy campers to deal with; and presents several opportunities:
1. Homes often can be bought for the mortgage balance from the owner. This doesn't make sense unless the loan can be discounted to bring down the cost of the unit.
2. The loan can be bought at a deep discount from the mortgage holder. Here's why that is possible: The lender knows that a new home dealer marks up a unit as much as 40+% over his cost. It has factored this into its loan underwriting criteria. It also knows that a repossessed unit carries with it a huge liability. No matter who owns a unit, rent has to be paid where it is sited, and it can deteriorate swiftly if left untended. For all of these reasons, when a foreclosure looms, being able to dump off the loan makes a lot of sense to the lender. One four year old loan that had a $49,600 balance was bought from Chase Mortgage for $10,000 after we emailed photographs of the abused double-wide unit to the lender with our offer. Once we owned the loan, we paid the owner $5200 for her equity, forgave her indebtedness and agreed not to file an adverse credit report.
3. The odds are that a person who isn't making the loan payment is also not paying the lot rent. That makes for a motivated lot owner. A rental lot can often be bought at a reasonable price when the owner hasn't been receiving rents. In many States, because of the cost and difficulty of putting a mobile home on a lot, the law affords mobile home owners extra protection from eviction. The process can be expensive and take many months. All this makes the lot owner susceptible to a reasonable cash offer for the lot on which he is paying taxes and liability insurance, but not receiving any income. After discounting the price of the home and loan, we approached the lot owner. He sold us the lot for $25,000 cash plus a $25,000 loan. This was paid off when we sold the property.
4. Anytime a lot and home can be merged, the entire package can be sold for a huge profit over the amount invested. The magic occurs when a mobile home is “married” permanently to a lot on an approved foundation, then sold as real estate rather than separately as a manufactured home and a lot. Each area has a slightly different procedure for converting a mobile home to real estate, but it is usually pretty easy and amounts to filing a few forms and having the home inspected. This qualifies the home and lot package for financing from a variety of lenders who will find a ready secondary market at Fannie Mae. Not all areas have access to this kind of financing, so it behooves you to check out the “take-out” financing for used mobile homes in the area where you expect to go into this business. Over the years we've found a wide variety of willing lenders. After some persuasion, a local bank financed my first mobile home. Today, local banks continue to do so. Small insurance companies and credit unions have also made mobile home loans to owner occupants from time to time; and even on older used single wide units in special situations where buyers pay higher down payments.
In the foregoing example, after we had bought the loan from the lender, the home from the occupant, and the lot from the landlord, we had invested a little over $40,200 in cash. We spent another $10,000 fixing up the unit and landscaping the lot. We sold it to an owner occupant for $131,000 in cash with a fresh loan. After paying off the $25,000 lot loan plus selling and closing costs, we made just under $50,000. This all took about 10 weeks from start to finish. It`s hard to make this much money this fast rehabbing stick-built houses.
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MOBILE HOME PROFIT CAN BE MADE MANY WAYS . . .
When there's an active used mobile home market for double-wide homes built after 1976, entrepreneurs can risk spending their cash reserves because of the virtual certainty of being cashed out quickly. They can use cash to hammer down prices on discounted mortgage loans, lots, and mobile home units. The key phrase here is “active use mobile home market”. “Active” markets are created where home prices have become unaffordable for many, and/or where comparative price advantages exist; such as in resort areas such as Lake Tahoe; or desirable locales such as Santa Barbara's waterfront community; or in many manufactured housing communities.
In many areas amenities in up-scale communities exceed those that can be found in conventional neighborhoods. When they are gated, they offer more security for their residents. For these reasons it is not uncommon to discover higher income people choosing to live in manufactured housing communities. At the opposite end of the housing spectrum, stick-built housing prices have made housing unaffordable for many. That is the situation that prevails where I've been buying and selling lot/home packages. It can be happening right beneath your eyes where you live, but you've got to check out the possibilities yourself.
In addition to lot/home sales, mobile home opportunities run the gamut from individual lots that can be zoned for one rental unit, to rental parks that cater only to people who rent both the home and the land, to small mobile home enclaves of less than 10 lots on which all units are owned by the occupants. All of these more or less operate under the regulators' radar because they are so small. To get around the regulations, one enterprising park owner put up walls and separate entrances that divided his larger park into several small parks of less than 10 units, each owned in a separate Trust. It’s working fine so far.
Another area that is overlooked by many is financing of individual units and of small parks. When institutional lenders won't play, it leaves the field wide open to private financiers. One Las Vegas lender held over 300 mobile home loans. I bought one of his loans at par with a stated interest rate of 18%. It had a $100 late fee which had been paid monthly for eight years straight. The late payor wanted to use Social Security payments to pay this loan, and they always came in a couple days too late. In general, when the usual credit underwriting criteria are observed, mobile home loans are an excellent place to invest Roth IRA funds.
Near the top of the list of entrepreneurial opportunities lie those advantages to people who develop mobile home lots and sell the homes that go on them. This works extremely well where rental lots are limited. At one point of my life I lived near Wrightstown, NJ where rental lots were very limited. The local Spartan dealer cut up a farm near Fort Dix and rented lots for a nominal price, but only to those who paid top dollar to buy new mobile homes from him. That was a long time ago, but nothing much has changed over the years. For instance, you recall in a prior example I paid $50,000 for the lot under the home; would you believe that I chortle over being able to buy a lot today for $75,000 in the Reno market?
One entrepreneur in the Southeast buys land and cuts it up into individual 1-acre lots. His cost of about $12,000 per lot. He puts new mobile homes on them. He either sells a lot to someone who has bought a unit from him for about $60,000; or he sells a lot/home package for $120,000. Sometimes, he rents the lot for $200 per month; but only to those who buy and finance mobile homes from his company. By creating a virtual monopoly of available lots, he's got buyers, brokers, financiers, dealers, and manufacturers eating out of his hand. This enables him to obtain their services and products at prices far below his competitors. How does he finance this much activity? He borrows the funds he needs from a Trust. It was formed by a number of self-directed IRAs who combined funds to be able to play in a much bigger game. Go thou and do likewise.