Podcast Episode #2: Tenants To Avoid and Yearn For
Finding and keeping the right tenants in your mobile home park (MHP) has a huge impact on the quality of your park. Nothing ruins a park faster than a bad tenant. They’ll all start to fall like dominoes as one bad seen infects the rest of your community. Once they’re in, a bad tenant can be hard to get out, so no matter how carefully you maintain your park, things start to go bad.
Stop the problem before it starts
Preventing this from happening starts with who you let live in your MHP. The vetting process is something you have complete control over as the park owner, so do your due diligence. Take the time to run background checks, confirm employment and don’t fall for a ‘hard luck’ story. Only the facts are going to tell you the likelihood of this person being a good tenant who pays on time, keeps their lot clean and doesn’t cause any trouble in the community.
Looks can be deceiving
It’s also important to look out for traps. It may seem appealing if a potential tenant offers you an entire year of rent up front, but what happens after that year? Why do they have so much cash right now? What did they do to get it? Don’t let the appeal of the cash stop you from looking into who this person is. If they came by that money as a result of criminal activity, like selling drugs, you do not want them in your park.
Get the bad out of your park
It a bad tenant does slip through, prepare yourself for a struggle to get them out unless you take the proper precautions from the start. One way to protect yourself is with month-to-month leases. This way, if a tenant goes bad, you can opt to not renew their lease almost immediately. If they’re a bad tenant, you’ve got to get them out whatever legal way you can, but it may cost you a little in lawyer fees if you’re not careful.
The best way to ensure your MHP community runs smoothly, with tenants who care about the space as much as you do, is to carefully vet tenants. Get more strategies from Glenn Esterson and Jason Sirotin in the second episode of the MHP Expert Podcast.
Jason: Hey everybody, Jason Sirotin here with The Mobile Home Expert Podcast, here with our mobile home expert Glen Esterson. Glen, how you doing today?
Glen: I’m doing wonderful. Another day, another dollar.
Jason: Oh yeah. So Glen, when we left off last, we were talking about The Mobile Home Park Manifesto, the book that you wrote, and we’re getting into chapter two which is all about tenants, and I have so many questions about tenants. I want to understand how did these folks get there, which we kind of talked about. Why are they there? Vetting them, how to keep them, how to get rid of them. And then, in the ones that we want to keep, I’d like to learn a little bit about how do you convert or what is the value of converting someone to a lot renter instead of a home renter, meaning that they buy the home and now are just renting the lot. Is that a correct way of saying that?
Glen: Yeah. We want to get them from renting a park-owned home into owning that home and just renting the lot.
Glen: That’s how you make a really sticky tenant in an intended who will stick around for 10 plus years.
Jason: Great. Well, we’ll tease that and we’ll leave for the end, but let’s start off with talking about who are these folks? We’ve talked about it before. These are typically people who are making eight to $14 an hour. They are the lowest income portion of America. But can you give us any more insight into the kinds of people that we’re dealing with?
Glen: Yeah. You kind of hit it on the head with the economic situation that they’re in. But outside of that, they’re also a tenant that wants something more than what an apartment can offer them at that same price range. Maybe they want a little extra space for a yard for their dog, maybe they want an extra bedroom because they had children, and the rents that they would’ve paid for an apartment would have prevented something like that from happening. Virtually all the tenants in the category have had some additional stressors in life that have prevented them from having more success. So, they’re also a bit more calloused to the capitalist kind of systems.
So, keeping all that in mind is one way to understand the tenants, but really understanding that all of these tenants really want a better life. They really want to try harder at something, but given their recurrent situation this is the best that they’ve got. For us as landlords, we want to be able to help them accomplish more in their life by providing them good housing, giving them good resources to reach up the ladder and not be stuck on that same peg.
Jason: That’s awesome. So, a lot of it must come down to vetting the folks because with those low incomes comes maybe some not so good seeds in the bunch. How do you go about vetting people, and are you that … or how should an owner go about vetting people?
Glen: Sure. I’ll tell ya from my experience when I used to landlord, I was not the greatest vetter of tenants. I was a sucker for a hard luck story and a pile of cash in hand. What I came to learn after falling for these hardship stories and that wad of cash is that my tenant base was awful, and I couldn’t get them to pay rents on time. One day they had $1,000 in their hand to move in, and the next day they had no money to pay anything except I guess their beer. I learned kind of the hard way about vetting tenants, and now if I was to own a park again I would definitely be much more insistent on tenants passing major guidelines for living in my park.
One of the first ones obviously or one of the top, in the top five nonetheless, is a criminal background check, specifically a sexual predator check. The last thing anybody wants us to have somebody like that in their park, and it will disrupt your park and make other tenants uneasy. So, you have to go through all of that. So, you have to run a federal check on them, and you have to get their social security number, driver’s license, and put it through some systems.
One of the more important things to watch out for is that guy with that wad of cash. It’s amazing to me how many people were able to show up with a couple thousand dollars to come rent the unit but then never have money again. And so, job vetting becomes very important. They got to make at least … some people say two times the rent, some people say three times or four times the rent. I feel like if they’re making somewhere between two and three times the rent from their job then they should be fine for at least paying the rent that you’re giving them.
The guys that don’t have the verified job, it becomes really hard to verify their job. Obviously the landscapers and people that actually have a job, they’re just working under the table, it becomes hard to verify. And I would say if you’re confident that it’s not somebody pretending to have an under the table job, make sure you call that guy’s employer and make sure it’s not his buddy who’s just vouching for him. Try and get something proving the income from that. A lot of these guys don’t even have bank accounts, so you can’t have them show you a bank deposit statement of regular deposits from an employer.
So, these are all things that you have to do. I was just hearing a story the other day from one of my buddies who owns a handful of parks, and he let somebody in with a hard luck story, and quite literally had a gun pulled in his face a few months later when he wasn’t able to pay his rent, and he was being forcibly evicted. And these are the kind of people that were disruptive to his park and would be disruptive to anybody’s park just because they had a good hard luck story and enough cash to squeak by to get in.
All it really takes is one bad tenant to really sour your tenant base. With drugs being such an epidemic, you got to watch out for guys that you know are drug dealers, and pill poppers, and crack addicts, and meth addicts, and all that kind of stuff because once you have one of those guys in you’re park, before you know it they tend to have a handful of friends in the park doing it with them. And then before you know it, you have an epidemic on your hands inside your park. If you get into a bad enough situation like I did, you might have to evict 80% of your tenants just to get it all out.
Jason: [crosstalk 00:07:36] These folks can ruin your business. It seems like-
Glen: They can ruin your business.
Jason: This is the most important thing you could possibly do. I have a couple of questions based on some of the things you said. Pardon me. So under the table, as a landlord do you have any responsibility for that? Because that’s not legal. Is there anything that can happen to you by renting to somebody who you know is working under the table?
Glen: No, as a landlord you can really rent to anybody. You want to make sure that they are a valid citizen and that’s what the social security card is supposed to do. And if you run the background check it will at least give you that much that they’re authorized to be in the States if they’re not a citizen. As far as providing housing for an unemployed person, or a person working under the table, or somebody who is maybe a drug dealer but you don’t know he’s a drug dealer, there’s no liability that will come against you. The main liability would be housing people that aren’t authorized to be in the United States. That’s obviously something the government would crack down on you about if they caught wind.
But as far as employment goes, there is no liability there. I just would strongly encourage to make sure the guy you’re renting to has some money in his pocket consistently, because turning your unit over three months later for non-rent, chances are that unit’s going to be trashed, and you just cost yourself maybe a year’s worth of renting in renovations and lost collections. So, it’s too dangerous to play around with that way anymore. And obviously you don’t want criminals in your park. You know what I mean? Who cares? I mean, not who cares, but somebody has a DUI, or a small pot charge, or something like that, most people are not going to worry too much.
But when we talk about criminal criminals, you’re gang members, and your violent offenders, and your drug dealers, you really need to avoid those people having any access to your park because that’s the riff raff, and the riff raff can get out of hand real fast. Those guys aren’t always the dumbest guys. Some of them were really clever, and some of them know how to work the system once they get in there, and depending on where you are in the country, what state you’re in, a lot of states offer tenant rights that are very strong and hard to move out even a bad tenant, even a non-paying bad tenant. So, you have to be very rigorous in your vetting process with these guys.
Jason: Have you ever had anybody who wanted to pay for a year up front or something like that? Is that something that people should be-
Glen: Oh yeah.
Glen: Oh yeah. I fell for that trap.
Jason: Oh, that’s a trap?
Glen: It was a woman at my park who was she seemed to have everything in order, she had a job, and she had all this money to move in, and she had some things on … she was upfront about telling me about, “Hey, I was arrested for disorderly conduct,” and stuff like that, but she seemed like an otherwise reasonable person. She offered to pay six months up front, and for what reasons or another, I didn’t take all the money up front. I only took her normal money first in security. But even with her, she became one of those riff raff tenants.
As soon as she lost her job, she stopped paying rent, started avoiding me, and then started getting other tenants kind of riled up, and she would go from one unit to another, and get something to happen at a unit that would cause them to say, “I’m not paying my rent until it’s fixed.” And it was a straight up nightmare for me. It took me probably six, seven, eight, nine months to get her out through the court of law because she refused to move out, and she kept saying that she had her rent and she would pay it once I would fix this, that, or the other. She knew how to work the system and she knew how to get other tenants to do the same thing.
Jason: It’s like a cancer.
Glen: She was also [crosstalk 00:11:55] part of that whole crack epidemic that I had at my park, and I could not get her out of there. Until I could, I had a very disrupted pork [crosstalk 00:12:03] needless to say.
Jason: Right. That sounds horrible.
Glen: It was horrible. I lost … it was one of the worst years that I had. It was 2010 or 2011, and it was a straight up nightmare for me. It nearly cost me everything I had on top of other things outside of this woman was happening because of the mobile home park, the city saying time to hook up to city sewer, and incorporate me into the city so my taxes were higher. It was just a, for me, a very slippery slope, and I could have avoided a lot of it, or at least managed to not have nearly as many headaches had I vetted my tenants even better. However, I think that woman probably still would’ve squeezed through, but probably not as many other people would have.
Jason: Great. That’s a real strong case for heavy vetting. You know what I think is interesting is that you haven’t mentioned anything, and I’m sure there’s a reason why, about credit scores. Do you even check credit scores?
Glen: I don’t check credit scores. I don’t know that at the caliber of park that I had that it would be a useful tool. Now, if I had a class A park that was dealing with more senior citizens, and was a really beautiful type of park, and really swell tenants, I maybe would institute some kind of credit score rating. But for the most part at the average type of C quality park with C quality tenants, credit scores are not the best predictor. I’ve run an eviction report, and I would call the previous landlord, but who knows a lot of times when they’re just giving you their buddy number to say, “Hey, I rented from you for the last two years,” and things like that. So, credit scores, no. Maybe, but if I did it again maybe I would look at it, but I don’t know that that’s really the most important criteria as a landlord to worry about.
Jason: Yeah. Wonder if it’s you just reduce it. So, a 420 would be a good score in that space. That’d be interesting to follow up on. Maybe we’ll do a blog about that and see what information we can find about what is the median credit score of somebody who lives in a mobile home park.
Glen: That’d be interesting. Yeah.
Jason: Yeah, it would. So, we kind of went through the worst case scenario of getting a bad tenant out. Are there easy situations? Is there a proper methodology for getting a bad tenant out? Because it sounds like bad tenants in general just destroy the value of your park any way you slice it. So, it seems like the faster you can get them out, the faster you’re going to be on a better path to a better exit.
Glen: Absolutely. Absolutely. What a lot of landlords do, which is different than apartment buildings, is often we don’t use annual leases. We do what’s called a month to month lease, and it gives considerable more rights to a landlord for tenants not paying. Whereas, if they’re in a lease and maybe they’re behind on their payments, but they’re not breaking any of the other rules in the lease, it can be hard to get them out.
Whereas if they’re month to month, it’s kind of free will and every 30 days I can decide if I want to rent to you again, and if I don’t, most states I can give you a 30 or maybe a 60 day notice, and say, “We’re done here.” And it’s usually not much problems. And a good tenant, you probably wouldn’t do that to a good tenant, but maybe a bad tenant who’s a good person is often going to go out. With all of the tenants I’ve had in my years, which hundreds at this point, I’ve rarely had to go through the court systems. Rarely. But enough of the times that I did have to go through, it’s always a pain in the butt.
Jason: And expensive.
Glen: And expensive because you’re paying an attorney, or you’re taking time off of work, or are you’re doing the filing fees and all these things. And it could be just a real burden. What many landlords will come to find out is most tenants if you ask them to leave will leave. They don’t necessarily want to be there if they’re not supposed to, assuming they can get somewhere else. If they can’t, maybe they stay and make your life a little bit harder. Then, often times we might say, “Okay look, assuming your unit’s in good shape and you get out of here on time, we’ll help you. We’ll refund this last month’s rent or something like that to get you out of here,” or refund the deposit, or whatever it might be.
Jason: Ah, dangling the carrot.
Glen: Dangling the carrots. Exactly. It’s one of those type of things.
Jason: Protecting your asset.
Jason: Well, right, because you don’t want them to go crazy and destroy your home. You want them to leave nicely, and if you’re a good human being you don’t want them to have no money. So, you’re looking out for both parties. I think that goes back to our first discussion of ethics. It goes both ways.
Glen: Exactly. You want to be in a position that you can’t look back at what you’re doing and knowing that you’re just putting someone else in a worse position so you can be in a better position. Now if they’re a bad tenant, you got to get them out and you got to get them out whatever legal way you can. But if they’re just a random late payer, and you’re just tired of them being a late payer, fine. But don’t renew their lease or whatever it is, but maybe make it so they actually have some time to find a place to go and things like that. If they left their unit nice, return their deposits. If they followed the protocol that would deserve a deposit back, definitely give them back because they’re going to need that for their next place.
I’ve heard war stories of the landlord’s threatening the tenants, “Hey, we’re going to call DSS on you because we know you have drugs in there and we know there’s a child in there. If you don’t move out by tomorrow,” and maybe that’s necessary at times, but if you vet your tenants well, you probably won’t end up in that situation.
Jason: Yeah. And we’re spending a lot of time talking about the bad because it’s the scary part, but based on what you said a few minutes ago, it sounds like most people, even the ones that you would think aren’t going to be respectful, it sounds like most people are respectful. Would you say that the majority of people are good?
Glen: I would say so, yeah. I would say the majority of my tenants that I’ve had, they want to be left alone. Their rents usually not too much, a few hundred dollars a month, whatever it may be, and outside of that, they want to know that the space works properly, and that they’re not being harassed by other tenants, or by landlords, or by whatever. And most of the time, they follow directions well and they live by the standards of their lease. Often though, you have to get on them about, “Hey, your car has expired tags. You need to fix that,” or, “You have too much trash outside of your room,” or this, or that, or the other. But those are smaller things that your property manager should be able to handle with.
And maybe you want to keep record of all the little infractions they do so when you have to have a discussion with them, there could be a nice list to show them, “Hey look, we’ve been working with you. Here’s a whole list of times we’ve had to tell you about something. Now it’s time to not have to worry about this again. So let’s, let’s tighten up your ship here.”
Jason: Well, and right and right there, Glen, a lot of people are lazy and they’ve missed that important step of tracking everything, and saving correspondences, and putting things in writing, and having people sign things because it’s not about that moment, it’s about what happens over a certain amount of time. So really, everybody should be tracking everything that they’re doing with their tenants so that they have a record that they can go and prove it to not only the tenant, but also if you have to bring the law in, the law.
Glen: Yup. I couldn’t agree more. It’s not going to hurt anybody’s feelings to write down each time you had to address something, but when you actually have to have that hard conversation, it will be digested easier by the tenant when you show them, “Hey look, we got a year of the same type of behavior, and we’ve worked with you, and now it’s time for you to stop being such a burden on us and let’s fix this so it become something where we have to ask you to leave.”
Jason: Yeah, because when you’re heated, when somebody’s like, “Tell me an example, give me an example,” you can never come up with an example ever. So, it’s good to have it-
Glen: Oh, [inaudible 00:20:56]. Think about arguing with your wife.
Jason: Exactly. Exactly. “When did I do that?” You’re like, “I have no idea. I can’t remember right now.”
Glen: Me neither, me neither.
Jason: Let’s talk a little bit about good tenants. So, what is a good tenant and how do you keep the good tenants? And what is the opportunity of a good tenant for your business?
Glen: Sure. So, in my mind a good tenant, and I would assume most people’s mind, a good tenant is somebody who is going to pay the rent and not give you headaches, right? Somebody who’s essentially going to enhance your tenant base or at least not disrupt your tenant base. The benefits of having a good tenant that’s vetted that isn’t going to be riff raff, if he’s going to encourage other people they know to come to the park as well when you have a vacancy, because you’re going to probably say, “Hey, you’ve been a great tenant. Do you know anybody else that you would want to live here? Maybe who’s looking for a place,” and you could offer maybe some referral fees or discounted rent for them for bringing a couple other people on. It’s one benefit, but the real benefit-
Jason: That’s a big one because the company you keep.
Glen: It’s a huge one.
Jason: Yeah, absolutely.
Glen: Exactly. Exactly. A good tenant is typically going to stay at your park for seven plus years at a time. Whereas, an apartment tenants going to stay there maybe a year, two years, something like that, right? So, with a lot rent tenant, it’s not uncommon to have them live the rest of their remaining time on earth at your park. Whereas, a park-owned home tenant might be considerably shorter stay, kind of like an apartment deal. So, your goal is to kind of convince them to become a permanent tenant, and depending on what state laws are where you are and local laws, you’re going to try and find a way to have them buy their home that they’re renting from you so they can become lot renters.
And once they own something, it gives them a lot more initiative to want to keep the park up, and have a nicer community, and, and they stick around until some major life change happens for them. But lot rent tenants definitely is the path that I would encourage most parks to transition their homes and renters into lot renters because that’s really where you’re going to get the value for your park if you decide to exit your park. The value on the tenant that’s renting a home is nothing. You know what I mean? It’s virtually nothing.
Jason: Because the houses depreciate.
Glen: The house is depreciating, maybe you’re getting a few thousand dollars per home for occupied or unoccupied home, it really doesn’t matter, but the lot rent you can apply a cap rate on there. If it’s got a $300 lot rent and your expenses are a third of that, you have a $200 basis to capitalize. If you were to capitalize, let’s just pretend for a minute, if you had a $300 lot rent with about 33% expenses or so, so you left with $200. You put that on a cap rate of let’s just say a seven and a half cap is most things are trading on right now, a .075, works out to about $2700 or so a unit, and that’s per month. So, when you do that times 12, that tenant per year to you is worth about $32,000 once he’s converted over to a lot renter. And that’s a big deal.
Jason: And you’re not responsible for the house at that point, right? If something breaks, you don’t have-
Glen: And no longer responsible. Exactly. You’re no longer responsible for the house, and after all expenses for what it costs to rent the land or operates the park on the land, you’re left with a tenant that essentially the tenant is worth somewhere around $30,000 to you, and you have 50 tenants that ends up being, what, a million five, a million six? Something like that. That’s where the value of your park’s going to come in. So, convincing tenants that are renters that you’ve rented a home to to then buy, it gives them some benefit because now they have a permanent residence as long as they maintain it, and it gives you a real benefit because now you’ve just increased your value of your park tremendously. And do that enough times with enough tenants and you go to exit, you’re going to make some money.
Jason: So, would you say that this is true, this is slightly off topic, but that it’s not a good idea for the owner of a park to develop relationships with the people in the community, and that that should be left to property managers? And then the follow up to that would be how important are property managers to the day to day health and wellness of your park?
Glen: Yeah. So, that’s a big deal. If you have a small park, it might be hard to afford a real property manager. Often managers are going to cost somewhere 10% of your rental income up to maybe 30, $40,000 about where it caps out at, and you might as an owner say, “I’m already here. I’m just going to do this work and I’m not going to use a manager.” And by doing that, you’re going to save some money for sure, but you’re then going to start getting every story from every tenant because whether you want to talk to them or not, they are going to come over and talk to you because they’re going to do that. And everything they’re telling you is usually aimed to get some kind of, what would you call it? A discount on rent or some other similar type of thing, and for me I was a sucker. You know what I mean? It’s like I couldn’t [crosstalk 00:27:07] help but hear them out.
Jason: I’m a sucker, too. That’s why I’m asking. Right. Yeah, absolutely. Because you feel, you have empathy.
Glen: Exactly. And my collections would tend to slide when I was … The more often I was there, despite collecting rent, the more often I’d hear hardship stories and say, “Okay, well get me next month.” And when I finally said, you know what, enough’s enough. I’m going to put a manager in here and do this properly, I didn’t have that issue. The manager might’ve had that issue, but he’s also got the rules to live by, his employment rules to live by with me that, “Hey, this rent needs to be collected.”
I think it makes it easier for a landlord to have a manager because he can be that layer in between, and the tenant’s not going to necessarily not get mad or not get upset about not getting a discount, but I think they understand that there’s a wall, and that guy’s just saying what the company wants him to say, and it’s easier for them to say no to that and accept it. Whereas if I’m there, they can sit there and just haggle with me about it because they know that I’m the owner of the park. It’s a harder discussion. So, yeah, you definitely need, in my opinion, you definitely need a property manager there to handle these tenants that way. And as far as developing-
Jason: Well, how do you vet them?
Glen: We’ll get into that here in a minute, but basically you’re going to want to use, depending on where you are in the country, somebody who’s licensed, and almost any realtor association around the country will have a recommendation of people. Call up almost any local realtor officer. There’s probably even somebody in there that has a certified property management certificate.
So, I recommend there, and then of course there’s major management companies regionally that can assist as well. What people do often though is say, “Hey look, John who lives over in the unit, he’s been here forever, real nice guy, and we trust him, and we’re going to let him collect the rents, or get him to show the units, and we’re going to discount his rent,” and either give it to him for free or take something off of it so he feel compensated for what we’re doing with him.
And when you do that, it’s nice, it saves money, and I’ve done it before, but my experience has been sooner or later money becomes up missing or something. A showing doesn’t get done, or you find a guy who can’t really convince a good tenant to move in, and I again would revert back to you’re better safe than sorry. Get a licensed property manager in there.
And as far as creating the relationships that your question there before had, I think it’s very important for the managers and if you’re an active owner to kind of have relationships with your tenants. It’s going to create good will, you just have to have certain amounts of boundaries and expectations put in place.
Jason: That makes a lot of sense. Glen, you really dropped some knowledge on us today. I really appreciate it. What is the next chapter we’ll be discussing next week in The Mobile Home Park Manifesto?
Glen: Well, chapter three is about what is MHP, what is a manufactured home park, and what are the variations of that? RV parks have become a major thing. They’ve always kind of been a major thing, but the secret’s out now, and then they’re definitely trading faster and more often than they used to, and there’s some, huge beautiful RV parks out there that is similar to operating a mobile home park, except now there’s a whole new business kind of aspect to it as well, especially if you’re a seasonal park.
And then, new things like tiny home communities. Are they going to be an actual thing people are going to live in, or is it just a fad? It’s yet to be seen. Some places are having success and other places aren’t, but similar type of model where they’re leasing the ground. And then, camp grounds with annual lease holders and things like that. There’s some variety when it comes to MHP, and you don’t just have to get into this business to buy a mobile home park. You can get the same type of aggressive growth with some variations in there. I’m a big fan of some of the mobile home parks that have a portion of their lot set aside for RVs. And there’s a real way to capitalize on that if you’re looking at cashflow right now.
So, we talk about that in the book a little bit next, and maybe we’ll squeeze another chapter in there dealing with what to expect when dealing with RVs or MHPs, and about the good, bad, and ugly, everything in between.
Jason: Well, that’s awesome because I didn’t ever think about that there were all these other things that were transferable in terms of knowledge, and they’re relatively the same thing, just some slightly different scenarios. So, I’m excited to have that conversation. Glen, where can people get in contact with you? How do they learn more about you and your business?
Glen: Well, they can always call me, and I’m always around and happy to give anybody some time if they want to talk about the business. They can also go to my website and that’s www.MHPexpert.com, and email’s always fine, too. Now I’m up and running with Marcus in [Millichap 00:32:59] out of Atlanta, doing a lot of east coast stuff with them now and nationwide stuff with them, and he could always stop by and have a meeting with me. But the easiest source of information is definitely going to be the website. And the quickest source of information is just pick up the phone and give me a call.
Jason: And your phone number’s on the website, and they can contact you via email via the website as well, right?
Glen: Absolutely. Absolutely. My phone number is 423-483-0492 for anybody that just wants to skip the step and give me a call right away.
Jason: Awesome. Glen, thank you so much. This is Jason Sirotin and Glen Esterson for The Mobile Home Park Expert Podcast. We’ll see you next week. Thanks a lot.
Glen: Thanks a lot.