Using Leases And Options To Multiply Value

Topics: Options

Ollie was a pro at turning mobile home parks around. He’d done it many times but recently mobile home parks have had to pay higher operating costs in a relatively soft market. There are a number of ways that profits can be made in mobile home parks. The most obvious one is to fill up vacant spaces with new tenants. Next comes raising rents. Next comes expanding the park by adding more spaces. Then comes financing purchases of new units. Then comes selling all sorts of amenities and products to residents.

One of the most overlooked profit centers is to retain a Right of First Refusal Option to buy any unit offered for sale for 90% of any price that a bona fide third party would contract to pay for it. Ollie knew all of these techniques and he was on the prowl to find a park to buy.

Ollie has found a 290 space mobile park that has fallen on hard times. It is run down with many vacant spaces, and the few people who haven’t moved out are planning to. Rents are pegged to $200 per month. Ollie offers to lease the entire mobile home park at $100 per space per month with an Option to buy it for $10,000 per space in its current condition. That boils down to $29,000 per month. This is about the same amount of money the owner has been getting, but now he doesn’t have to do any of the management himself .

He eagerly signs the Lease/Option with no money needed to buy the park, Ollie can use his own money to landscape it, complete repairs to the pool and club house, and require owners to begin taking care of the appearance of their mobile homes and lots. Most of the remaining occupants moved out.

Next, Ollie began buying new mobile homes and putting them on freshly landscaped lots. Even in the slow mobile home retail sales market, he was able to sell his units quickly for cash because he sold them at a price just barely more than the price he paid for the home and its set up. After an advertising blitz that pointed out the very low prices, people rushed in to buy these homes.

There’s a little catch here. Although the prices are only a little over half the price of competing new units, the lot rents in the park are $325. This is $100 more than spaces in competing parks, and the leases are secured by a Note secured by a lien on the unit that is payable on demand anytime the unit is sold or moved out of the park; or any time the land lease is in default.

In three years, Ollie had almost filled up his park with new mobile homes and increased rents to $395; almost $295 more per lot than he is paying on his master lease to the owner. In so many words, he made money filling up the park, raising the rents, and selling new mobile homes. He was only able to do this because he offered the units at prices that his competitors couldn’t primarily because he controlled the space where they would be set.

Had he sold the homes at full retail ,he’d have had to pay high dealer taxes and not been able to increase his rents so much. Not only does this translate to about half a million dollars per year in net cash flow, it also translates to the market value of the park. Read on.

There are a number Real Estate Investment Trusts in America that specialize in owning mobile home parks. They raise money in the stock market from investors who are interested in cash flow return on their money, so these REITs are always on the lookout for profitable parks that are large enough to absorb the costs of professional management. With so much free cash flow, Ollie’s park filled the bill.

The REIT bought the park for a price equal to 8% net yield on the net cash flow after all operating expenses. This boiled down to $6,750,000. Ollie’s Option price was $2,900,000. His net profit after a little over 3 years was almost $4 million; all because he leased the park and Optioned it at a time when the owner had problems he couldn’t solve.

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