Podcast Episode #4: How to Retire as a MHP Owner

Charles DeHart: Nice to be here.

Jason Sirotin: How you doing?

Glenn Esterson: I’m always doing excellent. Thanks for asking.

Jason Sirotin: Awesome.

Glenn Esterson: I’m doing fine, my friend, as well.

Jason Sirotin: So, Charles, tell us a little bit about yourself.

Charles DeHart: Yeah. I started out in the business maybe around 2013, and I was an owner. I still, actually, own quite a few properties, but got up to about 20 parks, maybe 2,000 lots or so, and then made the decision to start working with Glenn on the broker side, and we’re building sort of a broker business.

Jason Sirotin: That’s awesome. Yeah. We wanted to bring you in today because today’s focus is really around people who are getting to the age where they’re looking to retire and sell their parks, and since you’ve been through the cycle and you’re on the broker side and Glenn’s so knowledgeable, I figured let’s get you two together and let’s hash this thing out so that people who are making the move to retirement can get the most cash out of their deal and protect themselves from all standpoints. So, I want to start by just asking, what are some of the common signs that you’re maybe ready to retire in this business? What is on people’s minds these days that’s making them want to get out? Is it maybe the fact that the market has never been better and people are worried about the bubble or is it something else?

Glenn Esterson: I think it’s multifaceted, but before we dive into that, I just want to say a few words to Charles or about Charles. Charles is a very humble person. What he doesn’t tell you is he was a very successful owner with these parks and he was part of a large community that he helped build from the ground up, including another really great podcast on the mobile home industry, which I’m sure a lot of our listeners have probably heard before. Charles has done phenomenal with the ownership side and building the systems it takes to be a good owner, and he brings with him to us a whole lot of extra information that even I and my circles of people don’t really have access to.

Jason Sirotin: That’s awesome.

Glenn Esterson: So, we’re hoping this is going to be a real big benefit for our buyers and sellers that we get involved with. But jumping back into to your question about some of the things that make people consider selling, and the first thing you said, you really kind of hit the nail on the head. I think where we are as this economy right now, it’s in everybody’s minds, everybody’s suggesting it … I’m being generalistic, of course, but it feels like 2007 again, except we got more money this time and more movement in the markets than we had even then. With the debt yield curve inverting just a month or so ago, it’s historically been a six-month warning for a recession around the corner.

The older I get, probably like the older everybody gets, we think more and more about the economy and how it’s affecting our bank account. With an owner who’s thinking, “Hey, I might be a seller in the next one to five years, what if this recession is as bad as this last one?” Even though no one’s saying that, it’s on their mind. Some of the other triggers, though, are really just … they get wore out. These parks are not easy. Even once you get them as easy as they can be, they’re still not easy, and that’s why we tend to make more money in this business because it’s a harder business, so we have a higher yield, but it’s never … Most of the time, it never gets to be easy.

Charles has done a great job building systems to make it as easy as it can be. I’ll let him speak for himself, but I think they’ll agree with me that it’s never been easy. As you get older, you probably don’t want to work as hard in this type of business. Maybe you want to go buy a yacht and go down to Florida and sit on the boat fishing all day or something.

Jason Sirotin: Right.

Glenn Esterson: So, it’s family things and thinking about all the other sellers that might be entering the market just like they did in ’07 that really ramped up that bubble and then it’s harder to sell your deal because there’s all this competition, which usually has a negative impact on the pricing. So, Sam Zell is kind of a world-famous owner in real estate and he’s been indicating that he’s selling off a lot of this stuff to beat the rush of sellers that are coming into the market. So, those would be a few of the things out there that would quickly cross an owner’s mind that would trigger them into thinking about retirement and selling off. Maybe Charles has got a few more things to add.

Charles DeHart: Yeah. No, I appreciate the intro, Glenn. I think there’s plenty of reasons why sellers sell, but the one that I want to focus on maybe a little bit more for this discussion is probably more geared towards investment philosophy as opposed to the emotional attachments that go along with selling, especially for a lot of owners who may have built the property or have owned it in their family for a long time. That decision is a lot deeper than just investment philosophy. But to add in, the investment philosophy side of that into it is also wise to do.

So, I guess the way that you could really think about this is that very rapidly, and it’s being driven by a couple of different things, but pretty rapidly, cap rates have compressed. So, if you’re not familiar with cap rates, what that really means is it’s the multiple off of your … really, your net operating income, which you could also kind of consider as your profit. It’s how many times that profit someone’s willing to pay for for the property.

So, traditionally, the business has been somewhere around … Most people get taught 10 to 11 times the net operating income is typically where you want to be when you’re buying a park. It’s been that way for a long time. That’s what people are … a lot of the people that were … that came into the business when I did and even before then, that’s what they were looking at. What’s changed in that is the industry has gotten a lot more popular, so a lot of guys that are coming over from apartments with the multipliers are much bigger. The cap rates are basically lower, but the multiplier is bigger. It just means that for the same profit, they’re willing to pay more for the property.

So, there’s a couple of things that drive this. Most investors who’ve been in mobile home parks knew that this was coming because this is what happens when industries consolidate. So, right now, we’re in the early stages of this consolidation movement in manufactured housing. So, it’s something that’s probably going to be here to stay is that we’re going to see cap rates relative to interest rates that spread and probably stay pretty static, right around two points. So, that means that their interest rate drops, and I don’t know if it can go a whole lot lower than it is right now. They can definitely go higher, but as their interest rate drops, then the cap rate will drop, which means the multiplier is higher. It means your sale price is higher.

Jason Sirotin: Hey, Charles, just-

Charles DeHart: So, I don’t know what the-

Jason Sirotin: Can I ask a question real quick? So, when we’re talking about-

Charles DeHart: Sure.

Jason Sirotin: Just to put it in simple terms, and I know a lot of the people who are already involved know this information, but if my operating expenses or what it costs to run the park is about 30,000, are you saying I could get a 10x to 12x on that as an easy number?

Glenn Esterson: On your net operating income. So, just using easy numbers like that. Let’s say you have a nice turnkey park and you’re operating and you’re making $100,000 a year in gross revenues and you’re spending about 50,000 a year for it … Let’s say you’re spending 40,000 a year in expenses and your net operating income, or your NOI, would be $60,000. That cap rate is a result of how many multiples of that NOI you can get. So, let’s say, historically, it’s been a 10-cap. That would mean you would get $600,000 for your park. Today, the cap rates are closer to six to eight percent right now in most markets, and that would indicate that your property at 600,000 might be worth somewhere around $800,000 at a six-cap or 700,000 at an eight-cap kind of thing. So, the lower the cap rate, the higher the price and the …

So, what we’re seeing now, as Charles was pointing to, is this real consolidation with all these buyers coming in from all over the place saying, “Hey, this has more yield,” and that’s driving our prices up, obviously. It keeps this sellers market. As interest rates go down, so do our cap rates because now we can even get more aggressive with the pricing because the debt is cheaper to operate. But that’s kind of a-

Jason Sirotin: Right.

Glenn Esterson: … big reason why we’re in this bubble. As a retired guy, going back to Charles, and I’ll turn it back over to you in a second, it’s going to create some incentive for them to be worried about it.

Jason Sirotin: Yeah, that’s what I was going to toss-

Glenn Esterson: [crosstalk 00:10:22].

Jason Sirotin: That’s what I was going to toss back to Charles is … So, I want to hear the rest of what you were saying, but if you could also tell us if you are thinking about retiring in the next five years, is now probably a prime time to gear up to sell?

Charles DeHart: Yeah. You’d have to define for yourself what retirement looks like. Mobile home parks are not as passive as they’ve been billed as. Any owner that owns one knows that. It’s not exactly passive. There is some work to be done. So, if retirement is you don’t want to do the work in the park, then, yeah, I would probably look at right now as being probably a pretty good time to sell. The reason why I would say that is it’s more about opportunity costs. So, if anything changes, like we said, if interest rates start to rise or if a recession happens … The recession, what that does is it knocks out buyers out of the marketplace. So, all the pretenders go away. Then, you’re now left with buyers, shortlisted buyers, who have more purchasing power or pricing power. So, price has dropped and cap rates will actually … they’ll go up in a situation like that just because there’s less competition for the buyers.

Glenn Esterson: [crosstalk 00:11:43] also going to go up during a recession as it always does. They keep it low for a minute, but then it starts to rise, and that … With the higher the debt, the lower the price of the park because there’s less yields leftover. So, that all has a tremendous impact on when is the right time to sell, and nobody’s got a crystal ball. None of us, right? So, yeah, if you’re thinking of selling in five years and we’re seeing the indicators that, “Hey, at least the next year or two, in one year, at least a year or two, might be challenging,” and mix in this election turmoil that’s all over the place and see if there’s a change of guard, that could hurt the economy, that can help the account. We don’t know. But if we don’t know, that means we’re scared and then we tend to pull out of something.

So, all of these factors, thinking ahead, geez, if I timed it just right and I make an extra few points on my money, yeah, probably, but is that risk worth it when you can beat all the other sellers to the market right now and get what is right now, seriously, some of the most aggressive pricing I have ever seen? I think that would outweigh the risk of, “Well, I could have gotten more if I held it for one more year,” and then a year and a half later, your deal falls apart when you think you’re selling it for top notch and you end up getting less because the economy started to tank and your retirement really might have to wait a few years because now it’s going to take a minute or you’re going to have to sell for a number that was lower than you could have at this point in the stage.

Jason Sirotin: On the flip side of that, right, the doom and gloom of a bad economy, wouldn’t that serve well for cashflow of MHP parks if you were-

Glenn Esterson: Absolutely.

Jason Sirotin: … in that situation?

Glenn Esterson: It does. Assuming you’re in a reasonable market that isn’t in the middle of nowhere and you have some employment opportunities, even during a recession, you’re going to feel okay. You’re going to feel like, “Well, at least I can get through it.” But you know what you didn’t get? You didn’t get to retire.

Jason Sirotin: Right.

Glenn Esterson: Yeah, [crosstalk 00:13:58] cashflow. You’re going to to get [crosstalk 00:14:00]-

Jason Sirotin: No fishing, no beaches.

Glenn Esterson: … here.

Jason Sirotin: Right.

Glenn Esterson: Exactly. You’re not going to be fishing. You’re not going to be playing that golf game, that endless ball game. So, it’s that, “Do I have the risk tolerance to ride the market further and see what happens or is this about as good as I’ve ever seen it, so I’m going to take my money and run?” That’s a personal decision, like Charles was saying. But from a metric standpoint, I would really open your eyes and see what’s going on with the debt right now, I would see what’s going on with the economy right now, I would read about these debt yield inversions that we’ve been having and I would really consider what an election that goes one way or another would have on an impact of your pricing and reliability of getting to the finish line if you’re trying to sell.

We’re seeing indicators that like if somebody like Bernie Sanders, who might be a great man and a very president, it might be the worst thing we’ve ever seen. I don’t know. I’m not there yet. But if some of his policies, like we’ve been seeing up in the Northeast catch on more and we see more rent controls come in place, you live in one of those markets, like New York right now, your property value just started tanking with all these rent control measures they just put in, and whether it might be for the social good, it’s not going to feel good in your pocket when you’re hoping that you were about to retire.

Jason Sirotin: Got it. Got it. So,-

Glenn Esterson: I would look as far into the future as you can with this and then balance it on what you really want in life right now.

Jason Sirotin: Yeah. So, it seems clear to me this is a seller’s market. You can make more than you’ve ever seen on the books to sell your property. Let’s get back to Charles and talking about some of the processes and things that you need to do if you’re getting ready to sell your park to get the maximum dollar out of it.

Charles DeHart: Yeah. So, what I would recommend if you’re in a position to where you’re starting to think about selling, then you need to start addressing some of the issues that are likely to come up during the selling process. So, there’s probably a couple of different categories you can categorize these in, but the first thing is you need to get your books and your records in order and presentable to a potential buyer, and the reason is is that if they have to go … if they have to do too much work, a lot of buyers will just back out of the deal.

If they have to do too much work trying to dissect what your records look like and if it’s very confusing, then most buyers will … they’ll either bow out of the deal just because of the level of difficulty or what they’ll do is they’ll start making assumptions, and as a buyer, you always make assumptions in your favor. So, if you have your buyer making a lot of assumptions, those assumptions aren’t going in your favor. So, they’re going to base their pricing on their assumptions, and if you have a lot of buyers doing that, it could result in you not getting what you could get for your property. It’s just [crosstalk 00:17:20]-

Glenn Esterson: [crosstalk 00:17:21] organization on your books and records, that’s a great piece of advice to give people is 12 months to 24 months, 36 months is your horizon. Now is the time to put these books and records together and have somebody like me or Charles give you a template to either use or talk to your accountant to use, but start getting everything prim and proper because if buyer doesn’t understand it, it’s going to make them underbid or walk away.

Charles DeHart: The second thing you need to do is you need to … I would look at things that you’re not doing that you’re leaving kind of some money on the table. What I mean by that is if … There’s a couple of different things you can do, but some of the things you want to look at, you really want to look really hard at your revenue numbers and try to get those up if you’re leaving money on the table. So, if your rents are below market, then try to start getting those up a little bit higher, or if you’re … let’s say you’re billing back water and your water expense is a lot greater than what you’re pulling in in revenue, you just match up your water bills with what you build a residence, and there’s a pretty big difference there.

Try to do a little bit of research, figure out what that problem is, why that is different. Either it’s a leak or some of your meters might not be working correctly or you’re not billing off of the right multiple or three of the things that could happen there. But that’s what Glenn and I have seen as being the most impactful things on value that are super easy to fix.

So, really far below market rents doesn’t take much to do that. You put a rent increase in place. You don’t have to go super crazy with it, but just something to help your revenue out a little bit more. Then, I would also look at your billing on your water because I’ve seen so many deals, they’re leaving hundreds of thousands of dollars on the table. When we talk about that multiplier, however much money you’re not collecting, that right there, you just multiply it by whatever the multiple is, 10, 12, 14, whatever your property is, and that’s how much money is coming off your sale price of what you could get. So, it can be significant.

Jason Sirotin: Got you.

Charles DeHart: Then, the third thing I would do is I would call up the municipality and do a real quick check on your property just to make sure everything’s in order. So, what you’re going to want to do is you’re going to make sure that you’re talking to planning and zoning to just make sure that they have their records straight, at least, that your property is legally allowed to exist. It’s going to be one thing that every buyer is going to do that and every bank is going to do that. Sometimes, municipalities do some things that are a little bit loony.

So, say if you get an answer that’s not correct, then that’s when you involve an attorney. You don’t want to find that out while you’re under contract with a buyer because a buyer is going to … they’re going to beat you up pretty hard over that. So, I would look at that, I would call code enforcement and just make sure that you at least have a record of all the code enforcement violations, if any, and that you can turn those over. The more information you can give a buyer on the front end, the less they’ll beat you up on on price. [crosstalk 00:20:50]-

Glenn Esterson: Don’t hide the dirt. Don’t hide the dirt with the buyers. That’s something a lot of owners make the mistake of. When Charles says go to municipality and look at how your property … make sure everything’s in order, if it’s not in order, don’t hide that from the buyer because you’re just wasting time because they’re going to uncover that and you’re going to look more transparent if you tell them upfront, “Hey, there is some encroachment issues,” or, “There is this issue or that issue, but we’ve accommodated for that in the pricing,” you’ll at least have a better chance of maintaining your pricing because surprises kill deals every single day.

Jason Sirotin: You’re adding unnecessary stress. That’s just stressful busy work for yourself.

Glenn Esterson: Yep. Yep. So, I would suggest that you give yourself your own little evaluation on the park. “Are my numbers in order?” Do the first thing that Charles was saying. “Are my rents in order?” like the second thing. Then, is the illegal stuff all in order? If you’re unsure, you give me or Charles a call and we’ll do an evaluation for you and we’ll tell you what we think are the holes in the program and what we should do to start remedying them. We’re pretty great at helping people with that. We love to do it, and it’s a free service we offer.

Jason Sirotin: That’s awesome. That’s added value, for sure. So, on the flip side of that, guys, what are some stupid things that people do that don’t add value to the park that people just think are important so they go ahead and start doing them? I’m sure people waste money on things that don’t add value.

Charles DeHart: Yeah. There’s not a ton of this stuff. I think a lot of owners are pretty … I don’t know. They’re pretty prudent with the way that they spend their money and do things like that on capital improvements. Off the top of my head, I mean, there’s definitely some things that you can do that don’t really add revenue. That doesn’t mean you shy away from doing that. It might upgrade the property into being more attractive for a different set of buyers. I mean,-

Jason Sirotin: So, the curb appeal is still important?

Glenn Esterson: Well, here’s one that is actually a pretty complicated one that happens quite often. Roads. Roads are big deal, right? If you have gravel roads, it’s a lot harder to finance [inaudible 00:23:24] than if you have paved roads, but paved roads can be expensive, especially if they’ve aged 20, 30 years without any good repairs other than just some cement and pothole fixing here and there, like a lot of the mom and pops do, myself included. When you repave a road, it can be very expensive, but it’s going to make your park look beautiful, but it’s going to cost you a fortune, and it’s not always recovered in your sale price when you go and sell.

So, on something like that, you have to do a cost benefit analysis and see what that extra value that you’re put brand new roads in today and you’re trying to sell tomorrow, what extra value is that brand new road giving you on a price that you’re trying to sell at or is it going to actually cost you in the long run? Let’s just pretend this is a small road. It could easily be $100,000. But let’s say the cap rate in the market is where we are now and it’s already pretty aggressive, but you’re not going to be able to compress the cap much to be able to accommodate 100,000 dollars. Plus, you probably want to get paid for your time and energy, so $100,000 is really just a wash, and you might not recovery.

But what you might be able to do is say, “Hey, I’m thinking of selling three years time or five years time, and if I put new roads in now, I can probably upgrade the rents a little bit and then, in a few years time, be set to make more money on that, and that would be a good improvement to do. But improvements that you tried doing last minute often can be an exercise in pretending like you took care of the park the whole time to make it look good at the end, but not necessarily something you’ll realize a profit on.

The cheap things I recommend people doing is things like tighten up your driveway, [inaudible 00:25:28]. Especially if you’ve got paved roads, but then gravel driveways, usually, the gravel will spit all over the place. Go buy some four by fours and pin it into place and do that. That’s not going to cost you a lot of money. Go and cut out any dead hanging trees that might end up getting rebid on during a buyer’s thing because you probably got some guy with a chainsaw that can do it and a buyer’s going to bid a professional service on it. I think even Charles and I went through that on deal, if I remember correctly.

Charles DeHart: Yeah, probably did.

Glenn Esterson: Yeah. What was it? The deal in Petersburg that we did? You remember the buyer on that deal? We’re not going to name people, but the buyer on that deal, I think, was asking for a $13,000 discount on removing those trees, and a mom and pop who had been on site could probably agree to move those trees for a couple thousand dollars. You remember that?

Jason Sirotin: It all adds up.

Charles DeHart: Yeah. Yeah. Yep.

Glenn Esterson: Yeah.

Charles DeHart: [crosstalk 00:26:26]. Add in some other things, too, some obvious ones. I mean, if you’ve got vacant homes, get them renovated and get them leased. Don’t just put warm bodies in there because you’re going to have problems [crosstalk 00:26:41].

Glenn Esterson: [crosstalk 00:26:44] real good. But simple things, I say do. If it makes it look prettier and it’s not going to cost much, then yes, it makes sense to do it. If you got ugly roofs, go get some roof paint. Get your maintenance guy up on there. Even if it’s the tenant’s house, paint the roof for them. Do something nice. Paint the roof for them and it’s going to help you on your sale price. If you’ve got skirts all beaten up by weed whackers, go buy some new skirts. Same kind of thing. This is the kind of cheaper expense that’s going to get you a better … not necessarily a better value, but a better presentation to maintain the value that chances are, if you’re using a broker, your broker’s probably pitching that type of quality anyways. So, you want to be able to maintain that line.

Jason Sirotin: Yep. Got you. So, guys, if I’m looking to retire and sell, what can you guys do for me and what do you do? What’s the process look like?

Glenn Esterson: Well, the first step that we tell everybody and try to get them to understand why it’s important is going back to what’s some of the first thing you should think about if you’re selling, even if you’re a year out, get an evaluation done, whether you use my team or some other broker’s team or a bank to do your own appraisal, which is expensive and costly, whereas my team will do it for free. We give you a pretty good idea of where you stand today and what can be achieved tomorrow. That would be one of the very first steps of what we help with sellers that are thinking of retiring. As Charles mentioned in the beginning, get those books and records in order. If they can’t understand it, they’re going to underbid.

Jason Sirotin: Well, if somebody signs up with you, Glenn, do they get that … are they locked in to use you or is this something that you do without a contract? How does that work?

Glenn Esterson: No, it’s contract-free and it’s price-free. We don’t charge anything for any of these analysis that we do. We’re here to help people achieve more with what they have. We would hope that we think we would be able to show them that we can help them even achieve more than that if they enlist us. So, Charles and I and the guys on my team, we crank out evaluations. Charles, how many evaluations have we probably done in the last 10 days?

Charles DeHart: It’s hard to say. It’s probably been 50, 75 of them.

Jason Sirotin: Oh, geez. I thought you were going to say, like, 12.

Glenn Esterson: Right? We were probably each doing 12. It just adds up. We’ve got a pretty large team now, so we’re running through evaluations, and some guys just want a ballpark and some guys want to know what that end field looks like, and we spend the time to really dig into it and pop all the balloons and say, “This is the real deal, whether you enlist us or not,” and we give some ideas of how to get to a better number if it’s not good enough. Then, if they want to enlist us, then we provide a marketing strategy and kind of walk them through what we think we can get done.

99% of the time, I would like to say that we more than pay for ourselves through the services that we offer, through the buyers that we bring and, ultimately, through the pricing that we achieve in getting you to the finish line. 9 out of 10 times, I’ve more than paid for myself. Charles would more than paid for himself. Any of the guys on my team would. It’s a net value. I mean, we … Here’s a funny story. Charles uncovered a real nice deal that we were about to sell in Florida. It’s, like, $13 million. We had a buyer for it overnight. We offered an evaluation, we told her that more might be achievable and then she went and talked to other people and was able to get somebody to pay even more than our guys could pay down this one deal and we lost it, but we added a lot of money to that lady’s pocketbook by helping her do that.

We’re still hoping that we get the deal back. We’re hoping the deal falls apart, but … Not really, but you know what I mean. But she’ll probably get her number, and because she enlisted an advisor to start at least giving her some guidance because nobody was giving her any, and even though we still lost out on the deal, we still felt good that we’re helping her essentially get more if you can get it done. Good for her. She can get more than we would have been able to get because sometimes it does work that way. But that’s the value a broker can bring, and it’s free.

Our team, especially, is well-equipped to do so. Both me and Charles are former owners, we both know how owners and buyers operate and look at these parks, and I’ve been a broker for a long time and we have quite the reach, so we understand how to sell these things now. Like I said earlier, most of the time, we’re going to more than pay for ourselves. Plus, you get a lot of free education along the way. When we get books or records that are sloppy, we help you organize them. We hope you enlist your accountant, but a lot of these guys aren’t really even using accountants, and it can be a challenge. If they’re going to try and sell it on their own, they might get 75% of the value that we can get.

Jason Sirotin: Awesome, man.

Speaker 4: That’s one of the main reasons.

Jason Sirotin: Well, I would say this. It sounds like if people are looking to retire and sell their mobile home parks or if they just have heard this information and say,” Hey, now is a good time to buy,” reach out to Glenn and Charles. You can reach Glenn at [email protected]. You can reach Charles DeHart at [email protected]. You can also go to TheMHPExpert.com and fill out a contact form or click on the number and you will be connected directly to Glenn. Gentleman, thank you so much for your time today. Really appreciate it.

Glenn Esterson: Yeah, always appreciate it [inaudible 00:32:49]. Charles, thanks for joining us. I liked having you on here with us, man. We got to do more of this.

Charles DeHart: Yeah, I enjoyed it.

Jason Sirotin: All right. Thanks a lot, guys. We’ll see you next time, everybody.