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Welcome to the Mobile Home Park Mastery Podcast where you will learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks! Your host is Frank Rolfe, the 5th largest mobile home park owner in the United State with his partner Dave Reynolds. Together, they also own and operate Mobile Home University, the leading educational website for both new and experienced mobile home park investors!
We have long held dear the concept that to be successful in the mobile home park business requires inclusion and it requires transparency when working with the seller of the mobile home park. And this is vital because we're win-win dealmakers. We want every party to be happy. It's hard for people to be happy about selling their mobile home park unless they feel like they got a good deal and they like you. And that's called bonding. And the way you get to bonding is through inclusiveness, talking to them like more of a partner as opposed to an adversary, and being transparent about what you're trying to achieve and what the goals are. But you have to draw the line on these discussions of transparency and inclusion when it comes to your plans post-closing. This is Frank Rolfe, the Mobile Home Park Mastery Podcast, where we talk all about how much you should and should not share with the seller when we start talking about the future. Now, most mobile home park owners are very, very nice people. They're very good-natured, they've tried to do their best, but often the reason that you're buying the mobile home park is that you see opportunity that they don't. And so when you talk about what you're gonna do post-closing with the mobile home park, there are certain things that you'll have to discuss if that's your mission, which are very sensitive to them and that may not play out very well for you.
The first one is just a general idea of raising rents. Most mobile home parks in the United States, rents are absurdly low. Do not believe what woke journalists may write over and over again to try and gaslight the general American public. There's no way you can tell me that a mobile home park lot rent in a city where the homes are at 2 and $300,000 is being unreasonable if that rent is $300 a month. That's absurd. That rent should be more like 6 or 700 a month in a market like that, possibly even higher. You look at some of the parks in Denver which rent for over $1,000 a month, and you compare those stats... Single-family home price, population, et cetera... And you overlay that in other markets and you will immediately spot that these other markets are crazily underpriced. There's probably not a mobile home park in America today that's running truly at market rent, except in those rare exceptions of some of the largest owners and some of the largest markets. So of course you're gonna be raising the rent. Now, we have never advocated going up a ton per year, even if it's warranted, even if you're 500 a month under market. We would try and go up roughly $50 a month if possible, until we get up to the target level.
But the rents have to go up. But mom-and-pop are gonna hate that discussion because often they get from the residents this feeling of acceptance and love that they're not getting elsewhere. I once toured a mobile home park with a guy. Every time he stopped the pickup truck and got out of it, everyone would come running up to him like he was some kind of Roman god, some kind of legionnaire returning from a campaign in who knows where. And he would have pockets full of candy and throw it to the children. Now, he thought that he got this much attention because people truly cared about him. I would suggest that no, he got this much attention because his lot rent was about 2 or $300 a month lower than the mobile home park across the street. And the people realized they had a racket going on. As long as this guy thought that they were his personal friends, he would never raise the rents as he should have up to market. And they were exactly correct. And if you said to him, "Hey, I want to buy the mobile home park and raise the rent," he would say, "You can't raise the rent on these people. Oh my gosh, no. Can't you feel the love in the air here?" He would take it as a very personal affront, the mere suggestion of raising rent. So in discussions with the seller on the fact that you're probably gonna raise the rent, that is not gonna go over very well.
Another thing that the seller is not gonna like to hear is that you are going to sell the rental homes. It's been a long tradition in the industry that sellers always feel, for some bizarre reason, that these rentals are a very successful part of the product mix. Even if you show them on paper how they're wrong, even if you show them that the average repair and maintenance on that old trailer is running about 2 to $300 a month, and you include in tax and insurance, and the next thing you know you're at 3 to 400 a month, and then the lot rent's another 400 a month, and he's only renting the thing for 700 a month, he's paying those people to live there. He'd be miles ahead simply giving the home to whoever is in it and let them pay their own repair and maintenance, tax, and insurance. But yet they never can figure this out. It's mind-boggling. So as a result, if you merely talk about the fact you're gonna want to sell the homes off, you're gonna get a very negative reaction from them. They think you're making a terrible business error. Those rentals are horribly, horribly important and horribly, horribly valuable, even if they're old homes from the '70s that aren't worth $1,000. All they can remember is all those decades of pouring money in the thing in repair and maintenance.
So in their mind, they're doing this calculation, adding up all the receipts of all the parts and all the labor, thinking these things are worth 30, 40, $50,000 on a 1971 trailer that isn't Blue Booking but maybe a couple hundred dollars. So you really can't share that concept with them either. And then comes the manager. Many of these mobile home park owners have such a fixation on the manager, it often crosses the line between an employer-employee relationship and beyond. And yes, we've seen mobile home parks where the mom-and-pop owner was in fact having an affair with the manager. It's also not uncommon for the manager to be a member of their family in some manner. But the problem is the overcompensation of these managers, particularly in light of their underperformance, is chronic. We once had a manager in Kansas City who mom-and-pop was paying over $100,000 a year to do a failing job at a mobile home park where they could not even get the occupancy up to stabilized levels. Who would do that? Nobody would. All you would have to do is fire the manager and replace them with someone who's actually capable for, let's say, $40,000 and save $60,000 a year. And it's so obvious to everyone, but yet mom-and-pop just won't do it because that manager to them is their friend. That manager to them is someone who is off the table. No, you can't fire them. So as a result, if you tell mom-and-pop, "Hey, I'm gonna go ahead and fire the manager upon closing," oh, they're gonna hate that. Might make them not want to do the deal.
And also remember, if you're too transparent with your plans, you could talk the seller out of selling the park. Because if you said that, "Well, your lot rent's horribly under market, I gotta raise that. And we're gonna give away all these rental homes because as you look here in the books, you're losing money on every single one. And I gotta get rid of the manager. The manager you're horribly, horribly overcompensating," they're gonna realize they're selling that park for too little. So it would be very much working against your best interests to go into mom-and-pop and say, "Hey mom-and-pop, I'm gonna do all these wonderful improvements and boost the NOI in this park up double." Of course, then they're thinking, "Now wait a minute here. Going back to this win-win idea, I think I'm getting screwed because maybe this park is worth twice what I'm selling it for." And that's yet another reason you cannot discuss these future post-closing plans. But there are some exceptions to the rule, particularly if the seller is carrying the paper. Because if the seller is carrying the paper, they will be involved in your post-closing plans. They can't help it. They're still stuck with you. They're still riding in the car, only now you're driving it. So how do we get around that? Well, one item is very helpful on the concept of getting rid of the park-owned homes is to put in that seller note a release price under which you can sell the homes off.
If you don't have a release price, you have no legal right to sell the home to the tenant or gift the home to the tenant. And as a result, you're stuck with them as rental homes. So we can't get around that plan. You'll have to tell mom-and-pop, "Look, I may want to sell these old rentals off at some point. So what would my release price be on each one?" If you bring it into the conversation on the front end, they never think you'll probably do it, so they don't push back as hard. So they may say, "Well, okay, just give me like $2,000 for each home to release it." If you came back to them later, post-closing, with this concept, boy, it would go up to 10 or 20,000 a home probably. So we gotta get those release prices in there. But also you gotta have them maintain confidence in you because they are in fact carrying the paper. They are your banker. So even though you don't have to tell them exactly what you're doing, you must at the same time share with them that you are making some level of improvements. Now, aesthetically, they'll love that. Anything you do aesthetically, well, that benefits the property. If you were to default and they got it back, having a nicer looking park is definitely good for them, makes it easier to resell. And clearly as the park looks better, it's gonna make it easier to refinance.
But also remember that as you improve the economics, as you raise the rents and you get rid of non-performing rental homes and maybe swap out the manager, they are going to benefit because they know that the stronger you are financially, the more likely you are not to default on their payments. Most mom-and-pops post-closing, their plan, which they probably are not sharing with you in detail, is they're gonna move far, far away, probably to somewhere warm, probably down in Florida, live on the beach somewhere, have not a care in the world. Yet they don't want you to destroy that by then defaulting and not making your payments. Then they gotta move back to Ohio or Pennsylvania, wherever it is, and no longer be in their nice, sunny, beautiful terrain. So even though they don't talk about it, they're okay with you doing these things. They're okay with you raising the rents and getting rid of the rental homes. They're okay with swapping out the manager. They just don't want to hear about it. Sometimes what a seller will do is they'll want to sell a property, but they won't let the broker advertise it.
This is called a pocket listing. And they do that because they don't want to be around when you raise the rent. They don't want to be around when you fire the manager. They want at that point to have already run off to Florida. So the key item is you need to insulate them from these issues. You need to have a helpline for tenants, so if they're unhappy, rather than call old mom-and-pop, whose number they may still have, they call the helpline. You need to have a better manager to explain everything you do to make it more transparent to the residents so they fully understand and they don't get caught off guard. If the rent is too low, you need to tell people the rent is low and here's why, and so we're gonna be raising it up, but we'll try and keep it reasonable so it will fit in your budget. But you can't escape making those improvements. Those improvements must be done, but just don't share them on the front end. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.