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Investing in Mobile Home Parks - A Long-Term Outlook

by Ray Alcorn   

(June 2007)

Question: Ray, what factors indicate the climate, good or bad, for investing in mobile home parks?

In my view, the worst that can happen for mobile home parks has already occurred:

  • Low rates and easy money for traditional housing

  • An industry-wide meltdown of "chattel" lenders for single and multi-section homes without land ["Chattel" is tangible personal property with titled ownership, other than land, buildings, etc.]

  • A resulting decrease of production levels to a fifty year low

  • With a decline in single-wides to 10% of total floors produced

That's what the manufactured housing industry has experienced over the past few years, so a case can be made that the industry must be at the bottom with nowhere to go but up.

Understand, however, that all of the above happened in the midst of the greatest housing boom ever. The industry brought most, if not all, of the problems on itself, and the finance issues above are the key to both the problem and the cure.

To survive, mobile home producers and retailers have been forced to focus on the land/home finance model using multi-section homes and completely abandon sales of single-wides in land-lease parks.

Realize that this is not due to a lack of demand for single-wides or parks, but a result of the lender backlash due to the industry's demonstrated lack of integrity in single-wide finance.

Industry problems = mobile home park problems

The result for mobile home parks is a weakening of fundamentals--steep decreases in demand and supply, higher vacancy levels, and lowered pricing power for space rents.

Obviously, the interests of mobile home park owners do not always jive with the production/sales side of the industry. Just as apartment fundamentals are counter-cyclical to housing sales, parks must compete with land/home deals for their share of the manufactured housing market, as well as apartments and site-built housing.

Some mobile home park owners have turned to rental mobile homes to bolster cash flow, and most have learned the hard lesson that the revenue is an illusion that creates more problems than it solves.

Others have closed existing parks for redevelopment, a by-product of an ever-expanding demand for real estate in favored areas. But the majority of park owners have suffered in silence wondering if the days of waiting lists and annual rent bumps will ever return.

I think there is hope--and opportunity--but like most change, it will require mobile home park owners to look further up and further down the supply chain to create and deliver a total housing product rather than just the land.

Background points to support my thinking

First, existing mobile home parks have what I call a "government protected franchise." It stems from the near impossibility of getting zoning approvals to build new parks in most jurisdictions. (Yes, there are exceptions, but few.)

That means the supply of land-lease spaces is constricted, which is known as a high barrier to entry for competition. That's a good thing, but only if the problem of reduced supply of the mobile homes and the financing issues can be solved.

Second, as a housing option, mobile homes have an inherent advantage over apartments--to own rather than rent--for about the same monthly cost.

Regardless of personal opinions about quality, realize that many people value the privacy of not having conjoined walls, a parking spot at the front door, and the freedom to accessorize their home as they please. Mobile homes are still a valid housing alternative, and can be very profitable if packaged correctly.

So, with of this in mind, consider the following:

The current increase in foreclosures--both from sub-prime borrowers as well as the natural cycle of a slowing economy--is in essence bringing the mobile home customer home again. (Pun intended.)

The sub-prime borrowers were the natural constituents of the mobile home market before the sub-prime lending frenzy stole them away, albeit aided by the dearth of finance for mobile homes.

So there are a rising number of people in need of housing (with credit problems, for sure), and it stands to reason that the land/home model is not going to be a viable option for a buyer with a recent foreclosure.

But these buyers may be salvageable as mobile home buyers and mobile home park tenants if handled correctly. In fact, this can be a huge opportunity for land-lease mobile home parks to recover lost ground.

The total housing package

The field is clear for mobile home park owners to offer their product as a package solution that makes the mobile home buying process simple, affordable, quick, and easy.

Notice, I did not say cheap. Affordable, yes. But to think mobile homes compete on price alone is a mistake. Like frozen food, the value is in the preparation, packaging, and convenience.

The opportunity lies in solving the supply, location, credit, and finance issues for the consumer and delivering the total package as a bundle of products and services. Note that last one: Service is the newest old thing to reemerge as a large determinant in buying decisions.

Finally tired of the self-serve world, the consumer is starved for someone to pay real attention to what they are willing to pay for. How do you deliver that product?

We here on CRE Online are certainly no strangers to the finance side. The "Lonnie deal" is the perfect solution for both note dealers and mobile home park owners, and we've been doing it right all along. Had Conseco paid attention to Lonnie Scruggs, they would still be in business.

But don't be fooled into thinking there is a dead lock as a "Lonnie dealer" to be the only source of funds for chattel loans. There are a few lenders now who also see the opportunity and are exploring programs for park owners to finance in-park sales.

More will follow as viable models emerge. My guess is this will become a niche lending space with increased competition as models prove out.

The supply side is a little more difficult. The drop in single-wide production is not going to turn around overnight. Right now the only thing keeping the single-wide production numbers from falling to zero are FEMA purchases.

However, there is one major player, Clayton Homes, who also sees what I'm describing here and is already gearing up a plant to build "park model" single-wide homes. Their finance affiliates are also ahead of the curve in reaching out to park owners to offer the wholesale credit lines for park model homes and a small (so far) secondary market for retail installment contracts.

And the final piece--service--offers perhaps the most potential for creativity and profit. Mobile home parks are by definition communities of people, and there is no end to the number of services that can be bundled with a home purchase or space lease.

Home repairs and warranty services are a huge issue for many owners. Benefits to residents may include local grocery store coupons, delivery services from local businesses, area merchant discounts, buying clubs, etc.

Think of the many inexpensive services hotels offer their guests as a way to add value without adding cost. A mobile home park has a captive audience, and other businesses can profit just from having formal access to the residents.

Bundle these benefits into the total product for greater appeal, higher value perception, and the pure novelty of making an old thing new again.

Follow the big players

Trends start at the margins, and this may be the edge of the wave. Homespun humor aside, Warren Buffet did not buy Clayton Homes for funsies. He saw his favorite play--a best-of-class player available at a discount price in a troubled industry. This is how he makes the big bucks.

In many ways this is a return to the very business model that my dad used over forty years ago to become one of the largest mobile home dealers in the south. He owned two manufacturing plants, a network of sales lots, each integrated with one or more mobile home parks, and in-house chattel financing.

We specialized in delivering a total housing package--home, land to put it on, financing, and service after the sale.

Honestly, I think the opportunity in the mobile home park segment right now may be the best in twenty years.

As always, local market conditions must be in place to support any property type. But given positive demographic trends, and the right product in the right place within the market, the mobile home park housing package as a value proposition can capture higher market share, improve mobile home park fundamentals, and create long-term upside for investors at every step.

About the Author:

ray alcornRay Alcorn is the CEO of Park Commercial Real Estate Inc., a real estate acquisition and development firm headquartered in Blacksburg, Virginia. In a career spanning three decades, through all types of economic conditions, he has been involved with the acquisition, sale, development, financing, and leasing of commercial property transactions valued over $250,000,000.

Ray is a renowned expert in commercial real estate with experience in apartments, office buildings, shopping centers, mobile home parks and hotels.

Ray generously shares his wealth of knowledge and experience in dozens of articles about commercial real estate.

Ray is the author of The Dealmakers Guide to Commercial Real Estate, THE definitive work on commercial real estate investing.

His book provides real-world information written by a true dealmaker, including how to identify opportunities, determine value, and how to structure deals for maximum returns. It is an invaluable resource for creating and building wealth in commercial properties of all types.

 
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