Podcast Episode #7: The Most Common Mistakes MHP Investors Make

Glenn Esterson: Oh boy, that’s such a common one. Look at a rent roll. Evaluate how many times this guy has made his payments over the last few years, and just assume he’s a good payer, and a good tenant because the seller told you he has no riff-raff in his park, and you took him for his word on it. This one happens on so many deals that I work on it’s bananas. Now we encourage people to really start with this topic is one of the first stepping stones into evaluating the deal. We uncover a lot out the gate and are able to remedy this during the deal, or we’re able to walk away before it costs anybody any real time or money.

When you’re vetting the tenants, when you’re looking at your due diligence, and you see a lease on all the 50 tenants in the park, or whatever it is, and everybody signed, and, oh, hey look, they even have an application with the social security number. Great. Doesn’t mean the previous guy really vetted those tenants. It could mean that that guy had a pile of cash when he talked to the previous owner, and the owner said, “You know what? I’m hurting right now. Go ahead and move in.” Maybe he has been a good tenant since the whole time he’s been there, but how often do you want to take that chance that that is going to happen?

When you’re thinking tenants you get past the money, okay? Start wondering where that money comes from. Are they employed? Are they making three times the rent, or at least two times the rent? You want to make sure that the tenants first have some job security as much that they can have at least to be able to afford the rent. That’s the easy part. The next is did you run a police report on this person? Did you look at the sex offenders list? Did you call the employer? Make sure that John Doe’s landscaping company actually exists, and then that guy actually shows up for work. These are the kind of minutiae steps that nobody likes to deal with, but I tell you they need to be done because before you know it you’re going to have some gangsters, or some drug dealers, or some true riff-raff in your park that will jeopardize your otherwise good tenants.

Jason Sirotin: Prostitutes, brothels, right.

Glenn Esterson: Brothels. I laugh, but it’s true.

Jason Sirotin: Man, people are itching to go to trailer park brothels. You might find Robert Kraft at one of those.

Glenn Esterson: Yeah, and on that note, really, any time you see a park near an airport, think to yourself, brothel, and just double check into that one because I can’t tell you how many times that’s come up. It’s like, oh, they’re gainfully employed. Maybe it’s not legal in that state that maybe you don’t want that in your park. We laugh and jest, but these things happen all too frequently in this fun business of ours.

Jason Sirotin: Yeah. Let’s talk about number two, not understanding the full impact of the municipality relationship.

Glenn Esterson: This one’s an important one and it’s grueling. It’s not one you will necessarily be excited to go do because you will definitely not always get a warm reception from the municipality when you show up in a new town, especially, if it’s a secondary, or tertiary market and say, hey, I’m buying ABC park down the road and I wanted to dig around, and hear what you guys are doing, but you need to do it. And what you need to be asking these municipalities is more than just about the permits for the park. Is there any violations against the park and stuff like that because that’s kind of the obvious stuff.

You want to pull the survey. You want to pull the title. You want to check the permits and make sure that these improvements are up to code. You want to just check for those obvious types of things, but you want to also dig deeper, and talk about where is this municipalities future goals with this town? Are they planning on expanding the city limits? If so, how does that affect your park if you’re just outside of the city limits? Is that going to increase your taxes? Is it going to make you hook up to some city systems that you don’t necessarily need because your other systems are working? What is the city’s plan for economic growth? Do they have any job stimulus type of programs out there? Do they have any programs to encourage outside business to come to their town?

Because if not, a lot of these smaller sleepy towns they just kind of have their head in the sand, and before you know it the town is kind of shrinking, and the city services are getting kind of a more archaic model. You might not find yourself having an easy exit at that time, or you might find yourself through this process that, hey, this town is definitely expanding the city limits, and definitely going to make that park hook up, and they’re charging a $3,500 cap fee per unit to connect, and you have to budget accordingly. So you have to go through all these kind of systematic steps because, first, the owner might not tell you.

Jason Sirotin: Why would they?

Glenn Esterson: A lot of these owners are real straightforward, straight shooters, but sometimes they don’t know what they don’t know. Some of the times you’re going to deal with the less scrupulous type of owner at times who might be hiding some information from you. So you got to go dig and you got to really dig at the municipalities office and let them know that you’re coming there to improve the property if you end up buying it. You want to be able to work with them, and hear what they have to say about that community, and what they would recommend getting done to stay off of their watch lists, and not get into hot water with them because that’s going to be an important conversation. And, man, if there was one thing of all those things that we’re going to talk about that I wish I would have did upfront, I wish I would have started with talking with the municipality when I bought my first park. I would have learned real quick that outsiders are not welcome. That probably would have given me enough to say, nah, I think I’m not going to go forward with this.

Jason Sirotin: Yeah, because they can burn you. They can make you bring in a sewer thing that changes the way that your whole park operates, right?

Glenn Esterson: Yup. For me, it almost took me totally out of everything that I owned because it was such a hard obstacle to fix and the municipality really doesn’t care about, at least this one, about me at the time that I entered into their county being not from there, being somebody who looked different than them. I definitely looked a little stranger back in my day, so I can respect that, but at the same time it made my life very difficult, so that should almost be at the top of the list.

Jason Sirotin: Yeah. We’ll make sure on the web page where the podcast lives to put a picture of old Glenn.

Glenn Esterson: It might scare off all my clients.

Jason Sirotin: So let’s talk about the third one, which is the lack of understanding the local market, and the economic drivers of that market, and the demographics.

Glenn Esterson: Perfect. Yeah, so that kind of touches on the previous one about the municipality and asking them about their future plans, but at the same time you got to do some research what’s going on there. You have to understand if that demographic is shrinking, if it’s expanding, if it’s gentrifying, if it’s whatever it is for that area because that’s all insight as to how it’s going to affect your exit, and help your pro forma modeling, and your own personal expectations in the future. Now I’m not against buying into a market that is shrinking. If it’s a market that I think is still a strong market and still has plenty of life in it, and you’re going to have the nicest park in that county, and you’re going to always have stabilized occupancy because of that, I’m not afraid of that, but you have to at least understand what’s happening there.

Maybe there’s some parks that I think will be excellent one day that are in current areas that I would not let my grandmother go live in, or if I had a daughter let my daughter go with me collecting rents, but in a few years for better or worse, gentrifying neighborhoods are happening right now and in a few years some of those parks might be worth looking at, and you can get them now at a cheaper rate than you will in a few years. There’s two sides to the coin on all that, but you want to be able to go in and understand that, hey, the demographics of this area are what they are today. And judging by historical, this is where they’re going tomorrow because if you don’t do that, you might really find yourself in a market that has truly fallen out of favor, and people are leaving in droves, and every year they lose a few percent, or something like that. And what does that mean for your area later on because your rent is going to be topped out forever at $150.

Jason Sirotin: I know it’s easy to focus on the negatives, but could there be positives that come out of understanding this where you can see that the park will be more profitable because of a demographic change?

Glenn Esterson: Oh, absolutely. That’s what I was referring to about saying if the neighborhood is gentrifying you might be able to get into a crummy area today, but in a few years might be a real good spot because maybe some big developer just bought this five acre track, and is going to do a nice high-rise, class A building there because they’re betting on the neighborhood too. If you can get ahead of those kind of people, you’ll get a real good deal out there, but at the same time you’re taking a chance. I mean, in a Charleston, I’ve done a bunch of deals now in Charleston in neighborhoods that historically were kind of violent and scary neighborhoods. Granted over the last few years they’ve gotten not as bad, but now they’re so close to the downtown section that they’re in the process of being gentrified. Over the last few years, I think I’ve sold four or five parks just in that one neighborhood on that one street. Those guys are seeing a value of future that I think is going to play out well for them.

Jason Sirotin: Will those guys likely get bought by people who are just trying to get rid of the trailer park so it can be further gentrified? And is that good?

Glenn Esterson: Well, this is where the morality of the empathetic capitalist comes in. Gentrification is going to happen. For better or worse, if you’re on good real estate by some standard because of location towards a bigger metropolis, or something like that, it’s probable that your neighborhood will eventually be gentrified, and you’re going to have a harder time finding affordable housing, or have to move further out. If you’re buying a park that is in one of those areas, I would really challenge you to really go and talk with your tenants, and learn about their fears and what they’re trying to live with, and what would happen to them if maybe some other guy was to buy the park and redevelop it, but maybe you as an empathetic capitalist are not going to redevelop it, but you are going to improve it, and maybe you’ll find a way to work with some of the good tenants that need a little break on the income while you’re doing this project, but at the end of the day, this is a fact of life.

We see it in every major urban center that gentrification happens and whether you can be a champion of someone who does it ethically, or whether you can just be one of the guys who does it like everybody else that’s up to you. I can’t tell you how to live, but that’s up to you. I would say there’s winners and losers into buying markets that are changing. Markets that are changing for the better very well might be a real winner for you. Of course, you could be buying into an area too early, and you might have some significant headaches, so looking forward for tenders.

Jason Sirotin: That is a really tough moral, ethical thing to decide because if somebody’s offering you a big pile of money, but it’s at the detriment of a group of people, holy cow, that’s just tough.

Glenn Esterson: Yeah. There’s probably people that will disagree with me on both sides of my argument, but I’m in favor of leaning towards the empathetic side and saying, hey, I know I could take your rents from $300 today to $600 today, but what is that going to do to you? And maybe over a seven or 10-year period, I can get this part caught up to a market rent with less impact on the people that are living in my park, or at least were there as I was buying my park, but it’s a tricky game. I don’t know that that’s what our topic is about.

Jason Sirotin: Yeah, absolutely. I know, but it is interesting.

Glenn Esterson: It is interesting.

Jason Sirotin: Another mistake that people make, and this is number four on our list, is chasing cheap value-adds, and biting off more than the new investor can chew.

Glenn Esterson: Oh, man, that’s so many people right now. If you’re listening to this, and you’re one of those guys, please don’t take offense. I’m just being straight with you. I love seeing people make money. I love helping people get a good deal where they can double and triple their values. I love doing it. I do it frequently for people, but some of these deals are such a challenge that having balls of steel isn’t necessarily all it takes to get a deal done, and profitable in this business. You have to, on top of the previous things we just talked about. You have to then consider, especially, with the time value headache model is this going in cap rate of nine or 10% cap in this very tertiary market that is only 30% occupied really worth getting it? Just because the owner is willing to finance it, and on paper everything kind of pencils out to, wow, that’s a good return, and look at that upside, but what’s that upside going to cost you?

I mean, it is easy on a value-add to spend $1 million and still have an ugly duckling at the end of the day. It is easy. And then there is no promise that the upside is going to come. It’s not that Kevin Costner movie, if you build it, they will come, so it’s not that kind of thing. If you misstep in that kind of business you could be on a very slippery slope, and have a real challenge with all future deals moving forward.

I just helped a gentleman exit a portfolio that he had acquired up to about 13 parks. He lived on the West Coast and the rest of these parks, or all of these parks were in the southeast. He was gung-ho about heavy value-add. He was picking them up left and right in ’12 and ’13, and by ’16 you can see the decay starting to really settle in on these things despite being a very intelligent guy. Despite having some decent crews of workers in these markets, and having management, for lack of a better term in place, he found himself even with 13 parks in the height of the market, ’17 and ’18 all of a sudden going into foreclosure on multiple of those parks having to kind of fire sale a few parks.

I helped him fire sale them taking the money from each sale trying to put it into the next one, and still not being able to keep up with, A, the investor demands, who then gets fussy, and maybe they start making some phone calls to organizations you don’t want to have to ever deal with. And from municipality saying, hey, this park has not been improved, and we’re having tenant complaints, and we’re shutting you down. Before we knew it, I had sold off, I don’t know, four or five of his parks. He had lost three or four of the parks, and he was in the process of trying to do something with the last couple of his parks that were so far gone that I at that point was not able to help him.

That’s where this really smart gung-ho type of guy, all of a sudden it gets a little overwhelming, and people put their head in the sand. It’s going to be hard to come back from something like that. I hope he does. If he’s listening, hey, I have nothing but respect for what you were trying to do. I hope we all can get together and make it happen properly the next time around because good people, and he’s a good person, still run across things that maybe would have been avoided if they had better guidance in the beginning. So watch out for that because that’s all too common.

There’s another seller right now, he’s also got 13 or 14 parks, and he’s on his way out. We just put one or two of his parks under contract, and they are such heavy lifts that I was telling you most of the people looking at them, no, I don’t think you should buy this. No, I don’t think you should buy this until it finally went to a guy I’m very confident will be able to pull it off because that’s one of the easiest ways to go bankrupt. It’s one of the easiest ways to get sued by your investors. It’s one of the easiest ways as investigations going from authorities that are all three digits long, and it’s no fun.

Jason Sirotin: That sounds awful. Let’s not do that, people.

Glenn Esterson: I’m telling you.

Jason Sirotin: So the next thing is infrastructure of the park not understood, or not properly inspected. And I think this goes back to some of our earlier points, but this points at some of the more obvious parts of that.

Glenn Esterson: All right. I did want to touch on one more thing on the previous point real quick, and then we’ll get to this is a lot of that example would have been avoided had … When you go to a restaurant when you’re real hungry and you order too much food and you can never finish that food your eye is bigger than your tummy. Sometimes, people have this idea of what upside should mean to them, and not really understanding that it’s just not achievable in some of those markets. If a park today is a nine or 10 cap in this market today, and there’s still all this tremendous upside left in that deal, there might be a real reason why. Maybe that should be a huge red flag for you to stare at before you move forward on it.

Jason Sirotin: Gotcha, gotcha. So back to the infrastructure of park not being understood or properly inspected.

Glenn Esterson: Sure. So on the infrastructure, man, that’s one that is often overlooked, too. We’re told, oh, hey, it’s got city water and city sewer, and the water is included in the rents, and it’s just fine because it’s public water, or, hey, this one’s got private well and private septic. You should stay away from those types of things because they could be a real nightmare. Those are kind of the two general ways people look at these things for better or worse, accurately or inaccurately. So this is the viewpoint that people are saying at this stuff. They don’t dig much deeper often.

Public water is great, no problem. It’s way easier for you until you realize that, hey, who owns those waterlines? Is it the municipality, or does the park because if it’s the park owner now you got to start figuring out, well, what’s the utility map on this part look like? How deep are those lines buried? What are those lines made of? When was the most recent repairs on this line? Is this a patchwork of copper, or of stainless steel mixed with the old black irrigation PVC mixed with the modern stuff, and where are all these joints at? Maybe that’s why this water bill is so high because you’ve got all these tiny little leaks throughout this mess of utility line put in.

If it’s owned by the city, and you never have to worry about it, that should almost be enough to say, okay, well, if I never have to worry about it, but did you go and verify that with the city? Did you go and make sure they own those lines, and up to what dollar limit is their responsibility? What size, or what distance from the meter is their responsibility? And all that kind of stuff. So things to look in on stuff that is tremendously important because you might say, oh, I don’t buy well and septic. Okay, well that’s fine too, but well and septic has a lot of advantages as a park owner in many cases. It definitely has disadvantages, but on the advantage side it’s very inexpensive for your tenants, which means you might be able to get a slightly higher rent because you’re giving cheaper water, essentially, to the tenants, but, again, you need to check what those lines are made up of, how much life that pumps got left on it.

The walls of the well are they in good shape? Are you going to have to dig a new well because this thing’s about to collapse? All those type of questions you have to ask. And on the septic lines, you really got to find out if it’s an old product of a septic line called Orangeburg. That’s a clay kind of pipe that that really falls apart nowadays. So you want to dig into these kinds of questions and find out because if you don’t, you could have some major capital improvements needed after you close that you can budget for. It could cost hundreds of thousands of dollars to replace these types of infrastructure in your park, but I don’t know that there’s a good, bad, or don’t do, or do, kind of system. I would say all utility structures are worth looking at, but you need to look deep on all of them. There is no easy one right out the gate.

Jason Sirotin: What kind of inspector do you get? Is there somebody who specializes in mobile home parks, or do you just call a regular inspector?

Glenn Esterson: There’s started to be some specialists out there, but it’s few and far between. The most typical way is people are going to call the guy that is already working on, their plumber, essentially. And the guy who’s been working on the repairs at that park over the last few years and talk with him, or they’re going to get a third party plumbing company to come out and do a full inspection for them. And you’re going to walk them through kind of what you think you want inspected and ask their advice on what else should be expected, and let them kind of give you a proposal on the system. It’s not that hard to do.

There’s plenty of guys, almost every town that will do it. Oddly, a lot of guys just take the seller’s word and they say, oh, well, there’s no water in the lot right now, so I guess everything with your septic is fine, and don’t think to come back during a rainstorm, or after the rainstorm, and see if the water is all puddled up, and all that kind of stuff to see what’s happening to the septic leach fields. They just kind of, myself included, I was like, “Oh, okay, I guess this looks right. Well, okay, if it’s broken I guess I’ll just have to learn how to fix it.” And that’s just the wrong approach to take. So, yeah, hire a third party. Have them come out, and if you walk them through what you want they’ll probably do a pretty decent job.

Jason Sirotin: Not just one third party. It sounds like the real work is getting multiple third parties that are specialists to come out because one person might miss it.

Glenn Esterson: Yeah. I would say good luck in trying to find multiple specialists to come out and look at things, but with every quote you get from people you should always get two or three quotes, right?

Jason Sirotin: Yeah.

Glenn Esterson: Sometimes you got to pay for somebody to come out and get you that quote, but I would say it’s probably money well spent if you get the guy that the owner is using, and then a second guy that you picked out of the yellow pages, or who came recommended from a non-owner entity party person, so you can have some confidence that, okay, everything is as it should be, or at least I know the things that are wrong with it, and take it from there.

Jason Sirotin: Gotcha. So number six on our list of seven is buying at the wrong time. So how do you know when is the right time, and the wrong time?

Glenn Esterson: Yeah, just tell me how do you know?

Jason Sirotin: I know.

Glenn Esterson: How do you know, right?

Jason Sirotin: And if everybody knew we, we’d all do it, right?

Glenn Esterson: Right. Well, everybody’s doing it right now, so shouldn’t I do it right now? I mean, my friend just bought a park. Should I buy a park because he’s saying it’s great. The answer to all of that is, yes, yeah, how do you know? Yes, it’s a good time to buy a park, and yes it’s a better time to wait to buy a park, and yes it’s a bad time to buy a park right now. It depends on where you are, and what your goals are, but I’m under the impression and opinion that a recession is coming. I don’t think it’s going to be a big one. Other reports I read suggest it’s going to be a reasonable and typical type of recession this cycle.

Next cycle maybe is going to be harder, but I would suggest that where I’m at right now I’m seeing really cheap debt. I’m seeing more velocity and more more sellers entering the market. I’m seeing the T-bill dropped to one and a half. I’m seeing more short-term loans than I am long-term loans. I’m seeing negative interest rates in other countries. I’m looking at all this various scribble on the wall trying to make sense of it, but I’m under the impression I wouldn’t spend my money on 90% of the stuff on the market right now. I would probably sit and just wait with my pile of cash for a deal over the next year or two, and just sit patiently, and then get a much better deal at that point. Then, of course, if something fell in my lap and it was perfect and that made perfect sense, I would move forward now because it’s still a good time to buy just it’s a good time to buy particular types of deals, and deals on your particular schedule of what your plans are.

If you’re a short-term investor, I would say it’s a very bad time to buy right now if you’re a short-term investor, three years or less. If you’re a more conventional seven to 10-year guy, it can be a fine time to buy right now, but if you’re a long-term holder then, yeah, it’s probably a reasonable time to buy right now, but for me, I just know, I think I know that there’s going to be some kind of reset, some kind of default system happening here soon. I would prefer me personally to sit on the sidelines if I was still questioning is it ready for me to get involved in this investment environment at this point? Because there’s no rush. Despite what everybody on the Internet is going to tell you about you got to get involved, you got to get involved, there’s no rush. Real estate will always be here, and there’ll always be good deals. It might not be the best deal, or the better deal, or whatever at the time, but there will always be good deals and there’ll always be winners and losers.

I’m so much more cautious nowadays that I would much rather be sitting on my few hundred thousand, or a few million, or whatever it is I got sitting in my bank then worrying about burning a hole in my pocket, and putting it into investment just because I need to invest because everybody’s telling me that it’s the right time to buy this particular type of thing because when everybody is squawking about how it’s the best time to do it right now, it probably means you missed the boat. You might be a little behind the curve on that one, and then you’re buying at the top of the market. If it feels to me kind of fourth quarter, 2007, right now it would be hard for me to tell you to spend your money on something unless if you were just adamant about your goals, and how this fit with your acquisition criteria and what-not, but if you’re just loosey-goosey right now, I would suggest sit tight for a little while longer.

Jason Sirotin: Gotcha. Okay. And number seven on our top seven mistakes every new mobile home park investor makes is financing and having high hopes.

Glenn Esterson: Literally the last on the list, and guess what? It’s the last on the list for so many guys. This could be right out on the top of the list, but since we’re here, financing, if nobody has told you this is hard. Banks predominantly don’t like to loan on mobile home park assets. If you’re a guy come in from Ohio trying to buy a park in South Carolina, and it’s your first mobile home park deal, and it’s got some value-add in that deal, and it’s got some park owned homes, you might find yourself talking to banks that will just never say yes to you. They might tell you yes in the beginning, but then when push comes to shove, they often say, you know what? I don’t think we can loan on this because of XYZ criteria is on the park, and ABC criteria is about you, and being out of state, and inexperienced.

So using that guidance you would understand why about 60, 70% of my deals that I do are generally a cash deal because a refinance is a lot easier. You just wait a year or two to refinance then the actual jumping through the hoops of closing a deal with a bank. That said, there’s plenty of great programs out there that can get you financed. We help a lot of people finance parks, but they’re more difficult, and there’s a lot of hoops to jump through, and really only a few parks, the higher quality parks that need all these bells and whistles the banks need to be able to get what’s referred to as non-recourse debt, which means you have less liability personally on that loan versus a recourse debt, which means if you default on the loan, they can still come after you on that. A few programs offer non-recourse debt, but there’s such limiting type of qualifications to get in.

Plus it’s not a 10% down type of business. Most banks are at the minimum going to ask for 20%, and often 30%, typically, is 25% down on these things. So you have to have some reset expectations, and just because the bank gives you the pre-loan approval does not mean you will get the final approval. Too many people have learned the hard way that that’s exactly what happens. And to make it even more challenging and more scary for a new investor because all of us love to use Fannie Mae type of loans that is we go and immediately talk to Fannie Mae loans and pay for an application. The first thing you’ll notice when you go and pay for an application with a Fannie Mae loan is the price tag. It can be tens of thousands of dollars for an application that you will never get money back on.

So if your money isn’t already secured, meaning you don’t have that money in your bank, and you are able to close the loan after going through all these hoops then no problem, the money is probably well spent on the application, but too many people learn after paying a 50,000 or $75,000 application with Fannie Mae that, hey, I’m going to syndicate this deal and I’m confident I can do it, and I’ve raised already this much money in the early stage, so I’m sure I can get the rest of the money by the late stage. Now, all of a sudden, you’re 15 days from when the loan needs to be closed, and you haven’t been able to raise all that money. Well, you are out that money if it doesn’t close, and that might put you out of business if it’s your first deal. It definitely will hurt your pocketbook because I don’t care who you are, that’s still a lot of money.

Jason Sirotin: Glenn, I’m guessing that you probably just saved people a lot of money. Likely a few marriages and just overall happiness. So thank you so much for going through those seven mistakes that, unfortunately, you’ve had to go through, but, hopefully, people can learn from the mistakes that you’ve seen, and been through, and come out on top. If you want to reach out to Glenn, and get more information about anything we’ve talked about today, his website is themhpexpert.com and you can reach Glenn at his email address, which is Gesterson, E-S-T-E-R-S-O-N is the last name @themhpexpert.com. That’s G as in Glenn [email protected]. You can also call Glenn directly on his cell phone, which is 423-483-0492. That’s 423-483-0492. I’m Jason Sirotin on behalf of Glenn Esterson and the Mobile Home Park Expert podcast. We’ll see you next time.