Recently, I attended a real estate conference where I was able to chat with other real estate investors. We introduced ourselves and what we specialized in. I told them that I invest in mobile homes. Many of them said, “Oh really, I did that once. I won’t do that again!”
I am still blown away by how many people make that comment to me. I have never had an issue. In fact, my best deals have involved mobile homes. So, I have compiled nine reasons why I believe people fail when they try to invest in mobile homes on leased land. Maybe you can avoid some of the same pitfalls they encountered and find the same success I have had investing in mobile homes.
1. They fail to get approval from the park manager or owner prior to buying a mobile home in that community.
• When you buy in a mobile home park, the mobile home you are buying is sitting on leased land. The land owner has the right to select who will occupy his or her land, within reason. You could be required to move the mobile home from the park, which will cost you a few thousand dollars. In most cases, the land owner will be “very selective” about who can take over the lease for the lot where your mobile home is located, resulting in holding costs going up, because he or she will require you to pay lot rent until someone takes over the lease agreement.
• I always check with the park manager or owner before I buy. I want to make sure that person is willing to work with me and my future tenants or buyers. Also, it helps me identify the manger or owner’s personality and how easy it will be to work with that person in the future.
They don’t properly estimate the after-repair value of the mobile home they are buying.
• Sold comparables are not as easy to acquire for mobile homes on leased land as for traditional real estate. Mobile homes on leased land are mostly sold privately and are never listed on the MLS. There are some areas where it is easier to find comps for these mobile homes, due to the number of mobile homes on leased land there. An important thing to note is, all mobile home parks are not alike, so you should make sure you are gathering comparable information in the same park or one exactly like it.
• In most cases, I talk with park managers and call on mobile homes in the same park for sale to get a grasp on what the ARV is currently. I have also used ghost ads to test the market and identify the ARV. Remember, the costs associated with buying and holding a mobile home on leased land is different from a typical real estate deal.
They don’t know which mobile home repairs to avoid.
• The most expensive repairs to make on a mobile home are roof replacement, HVAC replacement, re-siding, replacing windows and re-leveling. These repairs will be expensive and time consuming, and possibly result in other repairs needing to be made. These repairs can ruin your rehab schedule and destroy your budget. Your profit margin can dwindle right before your eyes.
2. They over-improve the mobile home.
• The rule of thumb in real estate investing has always been to never over-improve, because you will never get your money back. The same rule applies in mobile home investing.
• Mobile homes have built-ins that are designed to be lightweight to make transporting them easier. Many of these built–ins are custom sizes to fit in that specific mobile home. Many investors think they have to tear these out and put in new built-ins. If these are replaced, you will usually pay more to replace that custom-sized cabinet. If these need to be updated or replaced due to condition issues, I have rebuilt the inside of these custom built-ins or refaced them to keep costs down. The best rule of thumb is to improve the mobile home to the same condition of similar move-in-ready mobile homes in the same community.
• In most cases, I paint inside the mobile home and put in new flooring throughout. When the mobile home is newer or worth more, I will make more improvements than I would with a home of lesser value. It is the same as what we do with a traditional property flip. The more square feet a home has or the nicer the home, the more you will need to budget for improving and updating the home.
3. They try to make money moving a mobile home on their first deal.
• Some new mobile home investors believe that a free mobile home is a great deal. When moving a mobile home, you will have, at minimum, the following costs: disassembly, disconnection from utilities, transportation, permit to move, set-up, reconnection to utilities and possibly new porch, awning, deck, carport and skirting. There will be times when the site will need to be prepped for setup, so you could incur those costs, too. If the mobile home needs remodeling in addition to these costs, you might find that you are way beyond the ARV for that mobile home.
• In some cases, it can work out if you figure in all of your costs to move, rehab, acquire and hold, yet you still have enough spread on the deal when you go to sell or rent it out.
4. They buy the wrong mobile home in the wrong park.
• The investor may not perform enough due diligence on park rules and policy. Be sure to check on park-required repairs, back lot rent and fees owed by the prior mobile home owner that the park manager will require you to bring current. Also, consider the costs associated with holding a mobile home in the park while the home is being rehabbed to sell or rent and whether the park will allow you to sell, rent to own, or rent out in the community.
• The investor should check to see if there are park management issues. For instance, is the park manager ruthless with rules? Are there unaddressed drug issues in the community, thus giving the park a bad reputation? Are there issues involving maintenance or units left vacant? This could be due to the park having a cash flow issue, a park manager issue or a licensing issue—if it cannot operate as a park due to city violation, for example.
• The investor could have overlooked aspects of due diligence on the mobile home title transfer or taxes, among other things, which will cause delays and additional costs.
5. They don’t properly calculate all the holding costs and account for the correct duration for holding the mobile home.
• The typical holding costs are going to be lot rent, mobile home insurance, utilities and the cost of borrowing money. In most cases, you can negotiate a two- to four-month abatement of lot rent with the park manager. The time of year will impact your time on market, the demand in the market and the desirability of the mobile home in the market. It is best to figure in at least three to six months of holding to ensure you have enough cushion built into your deal.
6. They buy in the wrong time of year.
• If you are going to sell the mobile home for ARV, you should consider the time of year you are planning on selling. If you expect to get cashed out on the mobile home, you will need to sell it around tax refund time. Prospective buyers will have more cash to put down on your rent-to-own, seller-finance or cash-out deal. You will get a faster return on your investment. The polar opposite side of the spectrum is that they have less cash to put down on the mobile home around the winter holidays. The mobile home will tend to sit on the market longer around this time of year, making your holding costs go up. In most cases, you will have to pay lot rent, utilities and insurance at least over that period of time.
7. They take too long to repair and sell or rent out the mobile home.
• The mobile home will sit off the market longer, increasing your holding costs. In most cases, you will have to pay lot rent, utilities and the cost of borrowing money and insurance over that period of time. Plus, you could run into the time of the year where you are going to have a harder time getting the mobile home sold or rented. This has the potential to increase holding costs, also.