Podcast Episode #5: The Good, Bad and Ugly of MHP Ownership

Glen E.: Yup. The Mobile Home Park Manifesto.

Jason S.: It sounds slightly creepy, which I like. Anything with the word manifesto, since the Unabomber has always sounded creepy to me, but I like what you-

Glen E.: Yeah, I mean, but my point behind adding it was it’s not a how to guide, it’s really my philosophy guide on how to own a park and how to be successful. So when you add kind of philosophy to it, it becomes more of a manifesto.

Jason S.: Absolutely. So what I love about this chapter is you break it down into three sections and it’s off of one of my favorite westerns, the good, the bad, and the ugly. So today folks, we’re going to be uncovering the good things about owning a mobile home park, the bad things about owning a mobile home park and the ugly things about owning a mobile home park. So Glen, why don’t you just start us off with kind of an introduction to what this chapter kind of reflects on and what you were trying to do with it.

Glen E.: Sure. So when I was putting this chapter together, I was thinking of my experience as a former park owner and then my experience as a broker who has probably been to more parks than you can possibly imagine. And I’ve seen every side of a park at this point and I still continue to find new ones that surprise me and go “Oh really? That’s how you’re doing that there”, and it’s amusing and sometimes concerning. But when I bought my park, this was definitely something I wish I had been more aware of. Granted, I had already known that from just how people talk about trailer parks back then, “Oh, they’re always kind of rough”, and you have lower quality people for whatever that means. And so there was that expectation in there, but you know me, I’ve always kind of given the benefit of the doubt and said, “well, I’ll look at these things.”

And when I got that first park of mine, I just assumed that people would treat me nicely because I was treating them fairly. And boy was I wrong. Part of my experiences has been with tenants that were poorly vetted. There’s almost just… it could really quickly turn into an ugly situation. And if you vet your tenants really well, chances you’re going to have a good situation. And somewhere in between is the spectrum. And so the first thing you have to understand is really what to expect getting into these things. And, I’ll tell you this, one time I was driving up to a park for an evaluation and I drive through the city. It was a nice city, it was somewhere in the Greensboro, North Carolina markets and I’m driving up and I pulled down this gravel road to where the park was.

And immediately you realize, Oh, this is one of those riffraff parks, no problem, okay. And I’m going through this park and the skirts missing off of the trailers and there’s rusty rules everywhere and the gravel road is like bumpy as bumpy can be. And I come up to the first tenant who’s not in her house and her mother’s sitting on a porch and then her child, quite literally 50, 100 feet away from her at the front of the driveway and sipping on what I could only presume was the gas can, and was getting ready to take gas can. I’m hoping there was nothing in there. I quickly honked my horn and point at her kid and she was like, “Oh, it happens all the time”, and I’m like, “ay yi yi.” So I knew what I was getting into evaluating that park.

But that’s the kind of like stuff you run into. And that’s the middle ground stuff, that’s the stuff that shouldn’t bother you beyond just like, “wow, that just happened.” But it does set a idea that there’s going to be other problems in this park if this is going on. Yet, another park I sold, I was somewhere in the Rocky Mount, MSA of North Carolina, and you can immediately tell driving into this park that it was probably a dangerous park. And that ended up being true when we ran the police records eventually, and from what the owner was telling us that he had transitioned the park from being a gang banger park into being just retirees but I don’t think the transition was done. And you get even worse, you go out… I was out in the Midwest looking at a park and during the walk, during the inspections of the things it was like, “Oh, what’s going on with that trailer? It looks like it’s down or something”, and the owner was telling me, “Oh, well there was a meth lab there and it exploded.” It’s like these things really do happen.

I was selling a park somewhere in Southern… Well the Atlanta market of Georgia somewhere and another gang banger park and one of the guys that was going through there was actually assaulted, I wasn’t there for this, but he was actually assaulted by one of the tenants for driving through the park. And that park had a rap sheet, it would hit the floor from your desk. It was… these things can get real bad real quick, and once they get that bad, they’re really losing value and they’re going to be really hard to sell and you’re really going to have to lower your expectations. Of course, I’ve been to beautiful parks all over the place that are absolutely someplace I would not mind if my momma lived here. And if she was-

Jason S.: Right, that’s important.

Glen E.: You know and so, some of these parks are beautifully paved and landscapes and the homes are in great condition and you can tell there’s a sense of community and you can tell it’s a safe environment and that’s refreshing to see and we’re seeing more and more of those actually come about nowadays, because a lot of people have taken a lot of these older, more worn parts and have transitioned a lot of them. But it takes a monumental effort to transition a park and the ones that are nice and clean and you would be okay with your mom living there, those ones are going to sell for a premium obviously; and they’re probably making more money and all the other stuff that would make sense that wouldn’t give you too much of a headache and your time value headache trying to balance there. So, that’s kind of what to expect coming into it, right.

Jason S.: Well let’s talk about that. I mean a lot of that sounded shady and there were some really nice parts. But let’s… I think this is a perfect time to focus on… Well, I mean you know that going into the mobile home park space that they aren’t the most savory areas and some of them are not going to be great. But let’s talk about the good and I think you have a really interesting ethical approach to this as well that I would like to touch on too. So take away the good Glenn. Show us what’s up.

Glen E.: Sure. So the good stuff, look, if you buy a nice park and you run it properly, you vet your tenants properly, you’re going to be rewarded and you’re going to get plenty of cashflow from day one and you’re going to be able to grow that cashflow year over year. Sometimes maybe it just keeps up with inflation, but other times you might realize that you’re below the market, and it’s time to do some heavier increases. And there’s nothing wrong with the rent increase, it’s just matters how you deploy that rent increase. And with these parks, when they’re good they can be really good. Like, we’re working on a park, Charles and I right now in Florida and it’s a retirement park and it prints money for this guy. He’s also $150 below market, but it prints money for this guy and he’s owned it so long he’s not too worried that he’s below market and he’s like, “It’s the easiest thing I’ve ever done in my life.”

He gets money every month and it shows up like clockwork and he keeps up with the maintenance because he’s got a third party that kind of does all the maintenance there for them and it’s an easy deal. But he’s now looking at selling and he’s like, “Geez, but that’s so easy, how am I going to replace this kind of easy money?” And so that’s when you know you got it good, is when your park is not a headache to you, and when it just is really turnkey and you’ve vetted your tenants properly and you kicked out the riff raff’s, you’ve cleaned up all of the deferred ugly stuff that’s around there and it can be really great. They’ll build wealth really fast and the increase incomes that you can apply to these things or if you maybe have some vacant spaces you can build them out, but once you get to 100%, all that’s left is just sitting back and hoping that you’ve done a good process and staying on top of the people that get a little out of line. But when you get it good, it can be real good for you.

Unfortunately, it just doesn’t happen all the time. Often things catch you off guard and especially for the guys that are maybe in a tertiary market or if guys had lasted like me through this last recession and things can just catch you off guard. You go through a divorce, maybe your partner dies, maybe something happens and then all of a sudden you’re taking your eye off the ball and this really nice, good turnkey type of park is all of a sudden having a couple of hiccups. And maybe you’re a little too lenient in what’s acceptable with that, so you look the other way and then it starts kind of burping and eventually you got a full blown problem with your indigestion caused by the stress that this thing’s causing you. And-

Jason S.: Is that taking us into the bad? Are we moving into the bad?

Glen E.: Yeah, I think that would start to move you in the bad. And the bad… Bad is fixable, I mean, everything’s fixable, right? But if you take your eyes off of any part whether it’s the good or the bad part-

Jason S.: But some things are harder.

Glen E.: Something’s are just hard in this business as they say, every episode is one of the hardest businesses I know of. And it is… even at the best, like this guy I’m talking with, he’s 70 years old and he’s like, “This money’s too easy to walk away from”, but he remembers what the recession felt like because we talked a lot about that. And even for him it was hard then and it was not as well seasoned and turnkey as it is now. And so it can happen at any park at any time, and it often has to do with an owner who’s become complacent in her situation and then you start shifting into the bad. But a couple of the reasons that it’s good just to give some bullet points on it real quick. Look, you got cashflow from day one on almost every park you’re going to buy, assuming you’re buying a park that isn’t in downtown New York City or something.

And you have higher than average returns, you have the ability to grow the NOI year over year. You have limited exposure to most down economies, okay, because people will always need housing. And you have a 22 million people in our country living in these things and that number grows every year. So… Oh, and the most… one of the last good things about it that nobody talks about a lot, but it’s really one of the big things is the barriers to entry to mobile home park ownership. It is hard to get to own a mobile home park, but it’s even harder to build one. And so these things aren’t coming online anymore and the few that do are small and they’re really reduce of other parks. So you have a-

Jason S.: And why is that good though?

Glen E.: Why is that good? It means competition can’t outpace you.

Jason S.: Ah.

Glen E.: It means that the builders of mobile home parks can’t out build themselves like they do with residential apartments and houses every cycle. So that’s why barriers to entry is a real good one for mobile home park ownership. So those are some of the best reasons in my mind, what makes it good? And then as we transition into the bad for one reason or another, you find yourself at a bad park, right. Then what you’re kind of having there is either you took your eye off the ball or you bought a pile of hair and you’re now working your way out it. And depending on how you got there, you might have some emotional attachment to the processes and the woe is me’s and stuff like that.

But you still got to put your boots on and you still got to pick yourself back up and you got to get this thing turned around. Because if it doesn’t turn around the bad can quickly turn into the ugly and the ugly can quickly turn into foreclosure and that’s never fun. And you want to talk about an emotional launching, I mean you’re just going to be steaming with stress. So-

Jason S.: Yeah. What are a couple of common bad situations and then what are some common ways to fix those problems?

Glen E.: Sure. Alright, so common bad situation is, you have risk exposure everywhere, and I mean everywhere with these deals, especially if you didn’t do good due diligence buying the park or if you become complacent as a park owner, okay. So, and, not the label park owned homes, what we call POH, which is more or less a rental unit, mobile home, not to label them as good or bad because they have their benefits for sure. But with park owned home parks, meaning parts that are mostly rental units, maintenance is almost always unreported. Inside the unit, “Oh I got a leak in my roof”, or they maybe they don’t tell you because they don’t care because you didn’t vet your tenants and he’s kind of a sloppy person, right.

And a quick little leak that could have taken a few hundred bucks at most of the fix is now leaked through the roof, has now leak down your wall, has now ruined your window seal jams, has now ruined your outlets that are below the window, has now ruined your carpet or your flooring, and that has now also ruined your sub floor; all in a matter of a month or two or three these things could happen because a lot of these homes are built with OSB and it doesn’t tolerate water well, and that quickly becomes a few thousand dollar thing.

So, unexpected maintenance costs from not being diligent on your maintenance is one of the bad things, because it really can slide into a larger number very quickly. Some of the other stuff is that makes it bad but it also gives us some kind of barriers to entry is that getting conventional debt, meaning going to a bank and saying, “Hey I want a loan” is so much harder with a mobile home park than with any other real estate vertical. Banks are very reluctant to loan on a mobile home park in general. That said, there are some that are specializing, and right now this year, there’s more now than there ever have been. But don’t kid yourself, it’s like jumping through a thousand hoops to get to the finish line.

Jason S.: And how do you solve that problem?

Sometimes it can’t be solved. Sometimes you just pay cash and of all the deals I sell and I don’t care if it’s a $255,000 deal, I don’t care if it’s a $25 million deal; with all of the deals they sell, about 60 to 70% of them are sold in cash. Meaning somebody is going to outbid you and take cash to take this thing down because they know that the bank is probably not going to finance it, but they’re okay with that. They’ll, finance, they’ll pay the park, build the books and records, repair all the deferred maintenance, get everything prim and proper and in a year or two go and refinance.

Because refinancing a park is still not easy, but it’s a lot easier than getting the initial bank loan. So, that’s a risk exposure there and the bad… one of the real bad things about this and it still happens today, everybody’s trying to make a buck and we all get it, but there’s a lot of fraud in this business, especially during the due diligence process, not often, often, but you know enough that I’ve seen where it’s like there’s clearly two sets of books. And there’s the real numbers and the numbers that the seller is showing the buyer.

And it’s hard to uncover when everything’s written in pencil and everything’s written on spreadsheets that their mom collects the rent and writes the number down and their brother does the accounting and it’s all just handwritten stuff. It can be… you can find yourself buying something that wasn’t exactly as well-performing as you may have thought. For instance, I saw a portfolio in the Lumberton market last year and the guys that they bought it from had actually committed fraud in selling it to them. They sold them a set of books that the park could never have been performing at. But-

Jesus. What a bunch of scum bags.

Glen E.: Yeah. And they ended up having to take a judgment out on the people that sold them the park.

Jason S.: But how do you protect yourself from that? That seems ugly. That might go in the ugly category.

Glen E.: Yeah, it’s ugly but it gets uglier.

Jason S.: Okay, it starts in bad. Well it starts in bad because it was a bad due diligence and then that’s what causes it to go ugly, right?

Glen E.: Yep, that definitely adds to it, right. So you have… owners typically have very limited books and records to start, so you’re making a lot of assumptions. Kind of like what we talked about in that last episode where there’s… if a buyers making assumptions, he’s probably making assumptions on the low end, but he still could be making wrong assumptions. And you have to kind of fill in a lot of blanks. You really have to understand how to do due diligence properly and not be lazy with it or you’re going to be making assumptions that could cost you. And if they complicate the matter our business is a cash business most of the time, and there’s been a huge transition this last few years over into digital payments and insisting on just money orders and stuff like that.

But, historically it’s been a cash business. Tenants pay their $300 and $200 or whatever it is, to the landlord in cash. And I know for sure like when I had it, sometimes the cash maybe didn’t all make it into the bank accounts for one reason or another and it maybe it wasn’t recorded properly and you so then a buyer has to take my word for it that, “Oh no, no, no, no, no, Johnny always pays in cash and I just use his cash to buy supplies for the park, but that money’s really there.” And so-

Jason S.: Oh my God.

Glen E.: Right? It’s a… I was kicking myself for it because when I sold my park, I had to meat market. I couldn’t prove my income as well. And that was at the end of the recession and it was a real pain in my butt. And I thought I was a smart guy.

Jason S.: Right, well we all learn.

Glen E.: We all learn so that. So, those are some of the bad sides of it and one more bad side-

Jason S.: So, where does it get ugly? Oh, one more bad. Okay.

Glen E.: So it gets ugly… It almost always… and this is a good transition, the ugly starts, unfortunately with the owner or previous owner. And it often boils down to that tenant that they brought into that park. Often, myself included at times, would see a guy pull up in a nice car who comes out, somehow has a pile of cash in his hand and, “Hey, look, I need to rent the unit. I need to move it fast. Here’s $2,000 for the next couple months and I’ll prepay my rents or whatever.” And, if you’ve been struggling with occupancy and you’ve been fairly cashflow and you’d say, ” [inaudible 00:21:03] , what’s the worst that can happen?” And so, “If he’s bad I’ll just evict him”, right? Well yeah, it doesn’t always work out so easy, right. So you take his wad of cash-

Jason S.: Well evicting’s hard.

Glen E.: Right, evicting’s not the easiest. Even in the South where we’re pretty eviction friendly, it’s still a real pain in the butt. Especially in the Northeast and California man, like, Ooh, you vet that wrong tenet, that guy could be there for easily six months without paying rent. And in the South at least we usually can get somebody out in 30 to 60 days and that’s not terrible, but it’s still a headache. But if you don’t vet… So they let this guy with his cash move in, they don’t do the application check and he says he’s a landscaper or something or whatever and you don’t really vet him well. Next thing you know, you have a potential person in the park who’s going to ruin your park.

And in my case, I’ve done that before and before I knew it, I had a whole park full of crack heads. And I’m not being facetious, I’m being literal. I had a whole park that was not on crack and then a month later I had a whole park that was pretty much on crack. And all because I let this guy with the nice car who did landscaping and the wad of cash move in. Now of course I never saw him go to work. His lawn was always overgrown and made me say, “Shoot, I just put in a drug dealer. I know I did” And-

Jason S.: And then everybody was on the crack.

Glen E.: And by the 30 days that I wised up to this, I said, “Man, you are out of here” and he wouldn’t move, right? He’s like, “No, you can’t evict me.” Well I can and I’ll refund your money and you’re getting out of here. And I had to go through a whole process to get him out of there. And it was a real pain in my butt. By the time he got out of there was maybe 60 days later. And the-

Jason S.: And is it scary to, I mean, you’re dealing with-

Glen E.: Oh yeah.

Jason S.: You know? People-

Glen E.: You’re dealing with, well-

Jason S.: Criminals.

Glen E.: I’ll tell you how this ended. So, the whole park at this point, not the whole park, I mean I still had some good tenants. But basically out of my 30 something tenants, I had 20 something crack hands and that was by the 90 days now into this thing and nobody’s paying their rent. And I did get that guy out, but the next lady in line was like, “I know how to do this. We can all get free rent. We’ll just keep damaging the septic system and say it’s not safe to live here, so I’m not paying my rent until it’s fixed” and boy, for like a few months I got hammered by this stuff until I finally got… I said one day, “Enough’s enough, nobody’s on a lease. 30 day notice to evict almost everybody in the park”, and I had to kick every single person out other than five or six people.

Jason S.: Did they destroy your places?

Glen E.: Oh, they were destroyed. Some people had taken dirty diapers and smeared them on the walls.

Jason S.: Oh my God.

Glen E.: Other people had… I mean they took all their dirty laundry-

Jason S.: this is truly the ugly.

Glen E.: … didn’t take it with them and then peed all over their laundry and just left it in there for days locked up and dog poop everywhere. And this wasn’t one specific unit too, okay.

Jason S.: Right.

Glen E.: This is what happens when we [crosstalk 00:24:07]-

Jason S.: What do you do man? Well that is-

Glen E.: …And begin.

Jason S.: But see, and that is I think where people like me are getting value out of the podcast because you go, “Well, these things are preventable.” You can know the signs and look for copycats of these specific demographics and do your best to stay away. And will some slip through the cracks, yeah. Shit happens. But for the most part, that’s what’s great about this podcast is we’re learning through your mistakes. So thank you, Glenn. Really appreciate it.

Glen E.: Yeah. Let my failures be your successes, I guess. But cleaning up that kind of mess-

Jason S.: So how do you deal with it? Yeah,

Glen E.: Yeah, so cleaning up that kind of mess, do you know what it cost me? It cost me almost everything, because it happened to be in 2010, okay. And if you remember 2010 that wasn’t the best year I don’t think any of us have ever had.

Jason S.: Not a great year. Not a great year.

Glen E.: And so I’ve now just lost 90% of my… 80% of my park’s income. Even though they weren’t paying I mean I was still getting some money out of these guys, right. And then I had all these massive repairs to fix these units. Then the city decided to expand their city limits and incorporate my park into their town, into the city, causing me having a higher tax base. And then like most small cities will do, they figure out ways to create new revenue, so they increase their city limits and then brought city sewer to my park and I had septic there. And while a city sewer is probably better than septic, septics a lot cheaper. And when they bring you city sewer, you have to pay what’s called a tap fee. And in my case, I had to pay 30 something tap fees of $2,500 a piece and they don’t give you much room to pay that.

It’s mandated, you have to pay it and they can really shut you down if you don’t pay it. And I fussed and argued and did what I could, but no love. And I had to pay this thing that was almost $90,000 to get the city sewer thing hooked up and I didn’t have the money. I had to refinance my farm and my personal home, I had to pay that. And then of course that was putting me on a very slippery slope. I almost by the end of that year, had lost my personal home and the farm and barely squeaked myself out of the foreclosure notices and managed to be able to recover.

But let that be a real warning what happens during a recession if you’re not prepared and you’ve got all these other negative factors that could happen. And I’ll tell you, I didn’t buy an ugly park when I bought it. It was a decent park, wasn’t a good park, but it was a decent park and I thought I could make it a good park. But you try hard enough for long enough, you’ll get there, but sometimes the process takes the worse [crosstalk 00:27:05].

Jason S.: So Glenn I got to ask, I mean, I’m sure people who hear… And you know there’s a reason this is called the good, the bad and the ugly, they hear this ugly stuff. What in the hell made you decide to stay in the business and keep pushing?

Glen E.: Well, because like most of us who enter a crazy business like this, we tend to see the end of the rainbow, right? We tend to say, “Hey, there’s a clear path to that pile of gold over there” and if you have the endurance and wherewithal and the intelligence to be adaptable to the situations you’ll get there, because this business can get you there. I see people make billions of dollars in this business every day. We all got some crazy war stories about it, but-

Jason S.: But that’s every business, I guess. I guess this just seems-

Glen E.: But that’s probably every business right?

Jason S.: It is. I mean, yeah, I mean, this seems… I mean I’m involved in a lot of businesses and there’s been some really hard times, but I think what makes it… I mean, and sometimes way more expensive than $90,000 for a payout. But you know, you look at it and I think you start putting feces and urine and all of that gross stuff in it, the ugly stuff it becomes more unattractive. But I guess in an essence, it’s just like every business except this one has visible shit you can see.

Glen E.: Yep, and it can be scary, but that’s why we tend to have a larger yield than if you were to buy a land lease for a Wells Fargo that’s on a 30 year, 20 year corporately sponsored deal where you’re only gonna make 4% 5% something like that. Or an apartment building where you’re only gonna make four or five, 6%. And I have limited rent growth and limited upside. So it’s risk and reward. But it is definitely risk and there’s definitely reward. So there’s probably an easier way to make a buck, but if you’re like me and you found yourself in this situation, you’re like, “Well this is the way I want to make my buck. So we’re going to figure out how to do it”, and I’m hoping to be able to give some guidance on guys to avoid some of these kind of ridiculously just no reason to be in this situation type of situations. It just had a little bit of previous knowledge on how to avoid them.

Jason S.: Yeah. And we can’t thank you enough for taking on the hardships for us and teaching us all so that we don’t have to go through it. So Glen, I’m going to say this because I think you’ll agree, that if anybody is in a position of the good, the bad or the ugly and they want to chat with you about it and get your opinion on it, they can call you and email you and chat with you about it?

Glen E.: At any time of the day. I am available almost every day, Monday through Friday from 7:00 AM to 7:00 PM and trust me, people call me earlier and people call me later too.

Jason S.: Absolutely.

Glen E.: Hopefully I’ve been through enough of the ringer that I can point out plenty of red flags for you when you first start looking at your park to purchase, because that saying, I love to pop balloons and I like looking for red flags. And I’m more than happy to bring it to your attention.

Jason S.: And you do this for free, right?

Glen E.: And I do this for free. That’s correct. It’s just one of the services I do.

Jason S.: And you play the long game. Yep.

Glen E.: Yes, it’s the long game. I’m hoping by giving you quality service and honest service and service that is timely. And you’ll see that I kind of want to be around in this business for a long time, and I’m hoping that you’ll be a client of mine for a long time as well.

Jason S.: And you can learn more about Glen at themhpexpert.com, tons of blogs and resources on the site. You can reach Glenn at Gesterson dot… Sorry, [email protected] and Glenn, what is the best phone number to reach you at?

Glen E.: Call me anytime on my cell phone, (423) 483-0492. I’m almost always on the phone, but I’ll send you a text message if I am and I will call you back most of the time, the same day.

Jason S.: For the mobile home expert podcast, I’m Jason Sirotin with Glen Esterson. We’ll see you next time.