9 Plus Mobile Home Park Financing Tips & Secrets
Prepared by Andrew Ikeda
Congratulations on your desire to purchase or refinance a Mobile Home Park. If you are new to MHP investing, you’ll want to pay close attention to what I’m about to tell you.
First of all, I’m fairly certain you’ve had a heck of a time finding sources of loans for purchasing or refinancing mobile home parks (MHPs).
Let’s get straight to the points:
- You must have cash to bring to closing!! Most lenders will do up to 60% Loan-to-Value or LTV.
- A) Lenders want to see borrowers with skin in the game. They want you to assume some of the risk as well as give them some comfort and security.
- B) Clients often ask me if seller-carry is possible or allowed. Answer is no! Again, lenders want to see borrower put up their own cash and take on some of the risk. They are also concerned with “Silent Seconds.” With a silent second the seller can inflate the price of the park to help the borrower meet the LTV requirements of the lender. After closing, the seller can eliminate or ‘forgive’ the second, leaving the seller with essentially a 100% LTV loan.
- C) Lenders will accept the lower of either the appraised value or the sales price.
- D) THIS IS HUGE: LENDERS WILL NOT LEND MONEY FOR REHAB WORK, UPGRADES OR IMPROVEMENTS TO THE PARK. The amount to renovate the park must come out of your own pocket and CANNOT be wrapped into the loan.
- Lenders do not like Park-Owned Homes!!
- A) Mobile Homes and RV’s are considered “Chattel” property; it is not REAL PROPERTY like a site-built home, therefore, lenders will not consider rental income from the homes themselves even if it makes the entire park and property profitable.
- B) Lenders consider mobile homes like doing an auto loan. They will not lend on parks with excessive park-owned homes on them.
- C) A few lenders will consider park owned homes if the lot rents can support the debt service on the loan.
- Debt Service – The DSCR (Debt Service Coverage Ratio)
- A) DSCR is a measure of the cash flow available to pay current debt obligations (investopedia.com/terms/d/dscr.asp)
- B) DSCR = Net Operating Income / Total Debt Service
- C) A DSCR of less than 1 means negative cash flow. Example: A DSCR of .95 means that there is only enough net operating income to cover 95% of the annual debt payments. A DSCR of 1.2 means that there is enough to cover the annual debt payments and have 20% left over.
- D) Please contact me for more help or further explanation.
- Lenders do not like parks that are below 3-Stars (Out of 5 Stars)
- A) Parks must be in good to great condition. A 3-star park will be one that has paved streets, city water & sewer, and tenants pay all utilities, etc.
- B) The lots are well maintained: all the homes have skirts around them with no holes, tears, or visible damage.
- C) The homes are no older than mid-1980’s models. In other words, no homes built before 1985.
- D) Double and Triple-Wide homes are strongly preferred.
- E) Ensure that the homes and the property look nice. What do we mean by nice? It means that you would be willing to live in any of the units in the park yourself with your family (if you have one). Think “Pride of Ownership,” – You’d want to show off the homes and the entire park.
- Metro & Populated areas
- A) Lenders like to lend in areas where the population is 100,000 or more. That is because there is industry and economy near the park in the form of retail stores, jobs, recreation, and therefore stability.
- B) Lenders are very averse to lending in small towns like Blaine, WA (Population 5,056 in 2015) or Mitchellville, Iowa (Population 2,304 in 2015). There’s nothing out there: no stable business or economy.
- C) Clients ask what about towns located just outside major metropolitan areas? Good question! Most lenders will lend within a 5 mile radius (or 10 minutes) from the edge of the major metropolis area. Some clients try to push for 15 miles or 20 minutes. This is sometimes accepted but is generally up to the decision of the lender and their underwriters.
- D) For properties in rural areas, you should plan on private / hard money financing.
- What about banks?
- A) Banks could be your best bet, however, there are several things to keep in mind:
- Banks can also turn you down and / or may not lend on mobile home parks as an asset class
- Banks may take longer to close your loan
- Banks most likely have better rates and terms but your credit must be very good to excellent (FICO above 740) and you will need to have a depository relationship with them; i.e. you must have a checking or savings account with them and it must be in good standing and … they want to see that you have some cash available.
- A Bank’s fixed rate may only be 5 years or 10 years in length, then going to an ARM loan.
- B) Since Spring of 2016, I’ve noticed a lot of banks declining loans for MHPs. Not sure why that is but over the past year, I’ve had a lot more loan applications for MHPs.
- What about FHA, CMBS, and other Specialty Lenders that are not Hard Money?
- A) FHA / CMBS Lenders do have great rates and terms. However, they will not do loans under $1 million dollars!! Why? For the following reasons:
- They are too small. Loan officers tell me that it is the same amount of work and the same amount of documentation for big loans as for small loans.
- Second, they pool the loans into a big pool and then sell the loans to secondary and institutional lenders, who invest in hundreds in pools of millions or billions.
- Options and Solutions
- A) I’ve got the solutions and contacts with capital sources for you!
- B) There are no upfront fees
- C) We can do the shopping for you if you’d like. Most investors will also look for financing on their own but it can be a lot of work and you may end up spinning wheels.
- D) We are absolutely confident we can find a loan that suits your needs and the properties.
- E) You won’t find the above tips from any other lender – why? Because they don’t give much thought to MHP financing
- F) For small balance real estate deals (SBRE), rates are in the 8% to 13 percent range. That does sound like a huge turn-off, but the terms are 25 years! You might be saying, “So what!!” Hold on Bucko. Take a look and consider the scenario below.
$300,000 at 5.5% interest rate; 10 year fixed with 25 year amortization. End of 10th year, the balance is $225,468.54. This amount may be a balloon loan or will be converted to an adjustable rate mortgage (aka ARM) loan.
Here’s a loan at 10% interest with a fully amortizing 25 year fixed-rate loan. No Balloon:
Okay, so you are paying $10,606 ($32,713 – $22,107) more per year or $883.84 ($2726.10 – $1842.26) more per month. Before you say, ‘NO!’ to this loan offer, consider the following:
- If this lender can get you into ownership of the park within 14 to 45 days, would you reconsider? This would be a lot quicker than a bank.
- Do you have the cash to renovate the property and add value to increase the value of the park? If so, are you super confident that the park will be worth your projected value?
- Would you consider refinancing after a one to two year holding period? (There may or may not be pre-payment penalties depending on the lender. I have two lenders with pre-payment penalties and one with no pre-payment penalties).
- Did you know that if you sold the park after 5 years, you can recuperate all the interest expenses on your tax returns? (I am NOT a tax expert so please ask your tax expert for more information on this. I’ve been told that interest expense can be recuperated on your tax returns. This is not cash back on the sale of the property but you can add it in the recapture tax portion on your tax return. It’s similar to recuperating depreciation and amortization)
- If you sell the park for a gain, you now have the seed money to roll into a bigger and better park without having to sweat the down payment or LTV.
- If you have any other assets, you should be able to use it/them as collateral. The asset / property doesn’t necessarily need to be free and clear. There are lenders that will refinance into a first lien position (1st lien for them) and then offer any difference in current value as a loan on the subject property. Ask me about this as well if needed.
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