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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!
Being a good mobile home park purchaser or operator involves making a lot of snap decisions based on all the facts at hand, and often you are weighing the risk of a decision and the potential outcome, and you are weighing that against the potential downside of whatever you're gonna do. But there are some things in the mobile home park industry that are a given that you must never, ever do. They are pure truths that these things can never be touched. So I thought we would go over what those things are. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. We're gonna talk about the things you simply cannot do as a park buyer or operator. So let's start off with due diligence. You have to have a due diligence provision in any contract that you ever sign. You should never sign any contract to buy a mobile home park unless there is in that contract the ability for you to perform due diligence and cancel the contract if in fact you decide that you don't like the property. Why is that? Because none of us know when we put a property under contract whether it really is what we think it is.
Mom and Pop know all of the skeletons in the closet, we don't. They know about floodplain and other issues. In a due diligence, we decide whether the asset has the traits we're looking for in an investment, and if not, we have to throw it back. So never sign a contract without due diligence. Next, never sign a contract that does not have a financing contingency. You have to have the ability to go out into the marketplace and get a loan to buy the mobile home park, and you don't know when you first tie it up if you can get the loan. Perhaps the bank doesn't look as favorably on the deal as you do. Perhaps we'll have a financial meltdown on a global scale and no lending will be available for a while. The only exception to the financing contingency is if there is seller financing, but even then you need to have a copy of the seller finance note attached to the contract so you know exactly what the interest rates and terms of that are. Also, you should never sign a contract that has significant earnest money. Now the industry norm is roughly around one percent, which means on a million dollar deal you would put up $10,000 of earnest money.
But you can be a little flexible there, but not massively. I would never sign a contract that has as earnest money 10 or 20 or 30% of the purchase price. You can't put under contract a million dollar mobile home park and post $100,000 of earnest money, because the problem is earnest money is always at risk. Contrary to what people will tell you, they are not well informed on the real world. The title company will typically not give you your earnest money back until both buyer and seller sign a release. And if you have a seller who's a bit crazy or opportunistic, they may try and blackmail you and hold your earnest money at the title company until you agree to give them some of it. So you would never want to put up more earnest money than you could afford to lose if you had to walk away from the deal. And even if you did it properly and you gave them the correct termination notice under the due diligence, still, you can't have your money tied up in that title company for years through litigation. So you must only put small amounts in. If someone says, no, I need a much bigger amount, ask them why.
Why do you need more? Because you don't get it unless I don't cancel during due diligence and don't cancel during financing and then don't show up at the title company. It's just liquidated damages. You're not gonna be able to get it. I'm not going to mess up like that, hopefully. But sometimes they'll say, well, I want it because I want to know that you have the down payment money. They want you to literally post the amount of the down payment as your earnest money, and you can't do that. That's beyond foolish. Next, you must never agree to buyer specific performance in a contract. There's no reason for it. What buyer specific performance means is, if you decide you don't want to buy the mobile home park and you decide you want to cancel it, and they'll say you have a stroke or a heart attack or a car wreck and you're put in a coma, and so you did not terminate during due diligence and you did not terminate during your financing contingency. They can then force you to buy the mobile home park even though you don't want it. There's no reason you should ever have in any contract buyer specific performance, but you must also never sign a contract that does not have seller specific performance, because without seller specific performance, the seller can literally walk away up to the very moment of closing if they get a better deal.
Specific performance on the part of the seller means, once you sign the contract, if you show up with the money, they have to convey it to you. When you take that provision out of the contract, which some unscrupulous sellers and attorneys will want, what it means is you don't really have a contract. And if there's a better offer that comes up or they get seller's remorse, they can simply walk away literally on the day of closing, and there's no penalty to them whatsoever. Also, you must never, ever forget, if you buy a mobile home park, the date in which you must renew your license or your permit. You've got to know that date. You in fact need to have a little sheet of paper posted somewhere. I don't know where. Maybe on the wall, maybe in a drawer somewhere, something that you refer to all the time. And you check that little sheet of paper at least once a week to make sure that you are not going to violate that date in which you must renew your license or permit for the mobile home park.
Because the penalty may be they just say, oh, well, your license or permit lapsed, and therefore you have to shut the park down. You have to remember that cities throughout America hate mobile home parks. They think they cost them lots of money, that they're embarrassing to the city. They would love to kick you out, and they don't have any ability to really do that unless you give them that ability. And if you don't renew that permit or license, you may in fact have given them the opportunity to shut you down. So you have to know that date, and you always have to apply for that license or permit well ahead of when it expires. Similarly, on that same sheet of paper, you gotta post the date in which your loan comes due, because often you'll forget it. Now, it's one thing on the city permit, if there is a permit or a state permit to operate, because that's typically an annual thing. But bank loans can be five years, 10 years, 12 years in length, and you can tend to forget the date. And then what happens?
Well, if you forget the date that your loan comes to a fruition, you won't have ample time to refinance it. I get calls periodically from people who call me up and say, oh, I kind of screwed up. I forgot that my loan was coming due, and how do I start the loan process? I'll say, well, when does your loan come due? Oh, it comes due in three weeks. That is a crisis. You cannot get a loan from any lending institution in less than months of time. It might take you six months. A smart borrower might spend a year starting that process, because that way, if they cannot obtain a satisfactory loan, they could at least sell the property, but you have to know that date. You have to post that somewhere that you refer to all the time and say, oh, okay, I'm still good. I got four years to go, because if you forget that date, it could literally cost you your entire mobile home park. Also, you must never commit loan fraud. Loan fraud is just so very stupid. You're seeing that play out right now with people like Letitia James, the Attorney General of New York, who is supposedly someone who ticked the wrong box or claimed that a rental property was her homestead. I'm not really sure, but the penalties are so severe on bank fraud, it would... Makes no sense.
You're much better off not buying the deal rather than tell any untruth in order to obtain the loan. It's best practice just to tell the bank everything you know about the property. You provide, they decide. But don't try and mess with your application or any questions they give you. Make sure that everything you tell the bank is truthful simply because the penalties are so very severe if you don't. This is not a case where you want to ask permission or forgiveness. In this case, ask forgiveness? No, you want to ask permission. You want everything to be exposed to everyone, and that when the bank makes the loan, everything is completely on the up and up. Now, if you follow these rules, what's gonna happen? Well, you're gonna have a happy and successful life as a mobile home park buyer and operator. You won't have any problems. You'll have smooth sailing. You'll never have a loan come due that you forgot. You'll never have a permit or license expire. You'll never get caught in trouble in a deal you've tied up because you'll always have the ability to cancel during diligence and financing. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.