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Never Pass up a Good Deal Because It's Too Big

by Ernest Tew   

Alexander Burnett is very good at what he does. He buys and sells houses. Realizing the potential profits that could be made by investing in mobile home parks, he began a lengthy search for a small park he could buy. Eventually, he found an eighty-space mobile home park owned by a highly motivated seller.

The seventy-six year old retired General was adamant about selling for cash. Like most young investors, Alexander didn't have a lot of cash on hand because he kept his money working.

But he didn't want to pass up an outstanding opportunity for lack of cash. He did not let his lack of experience in mobile home investing stop him.

As a member of Creative Real Estate Online, he turned to Terry Vaughan for advice. Terry suggested that Alexander contact me because I live in the same state. (This is just another example of what can be achieved by Creative Real Estate Online members who network and cooperate.)

The seller wants "all cash"

After a few days of communicating by telephone and email, I flew to Miami to meet with Alexander and take a look at the property. We later met with the owner to get a better feel for what he might be willing to do.

We concluded that price was not as important to the owner as getting all cash. His motivation was to be free of management responsibilities and to "enjoy the time he had left."

Knowing that an opportunity like this wouldn't wait, we submitted an offer of $375,000 cash. With a few minor changes, the offer was accepted. The agreement provided that we would have the right to get our deposit back within thirty days if not satisfied with our investigation of the property and the related documents.

Our "due diligence" didn't turn up much we didn't already know. Half the lots in the park were vacant and little progress was being made to fill them. Nevertheless, we used the problems we found to negotiate an even better deal.

We explained our plan for filling the vacancies. It called for buying homes for cash, setting them up in the park, and selling on easy terms. We emphasized how much cash it would take to implement the plan.

The seller agrees to carry $175,000--interest free!

We reached an agreement to pay $200,000 cash down and give a first mortgage for $175,000. There's only one thing about the terms that might be unusual--The seller agreed to an interest-free loan.

The money we will save in interest is expected to be greater than any possible reduction in price--and a lot easier for the seller to accept.

I need to explain another reason for the low price. The park is on leased land with a remaining term of 67 years. Many people who would otherwise want to buy the property were "turned off" by a land lease. I suspect it is due to their lack of understanding.

After some lengthy discussions, Alexander and I decided on a very flexible marketing program. Customers will have four choices: They can rent a lot for $250 per month; they can "buy" a lot for $13,500 cash or on easy terms; they can buy a home for cash or on easy terms; or they could buy a home and lot for cash or on easy terms.

When someone "buys" a lot, they will be paying for a 55-year leasehold interest. That's long enough to satisfy most homeowners and the banker who will finance them.

We believe the plan will result in a substantial reduction in the cost of operating and maintaining the community. Once all the lots are "sold," there will be no need for advertising, on-site management, or a full-time maintenance man.

In Florida, a homeowner living on the land on January 1st can qualify for homestead exemption. If the land is leased, there must be at least fifty years remaining on the lease.

Homestead exemption provides that the first $25,000 in "assessed value" will not be taxed. This is expected to reduce property taxes by about 90%.

Once the park is fully occupied, any lots that were rented to park residents on a monthly basis can then be sold at a wholesale price of about $10,000 each. After deducting the monthly maintenance fee, the annual net return to the investor would be about 18% per year.

Everyone wins

Each party is making valuable contributions to the venture and will share the profits. Among other things, Alexander's contributions include finding the property, marketing the lots, and assuming the day-to-day management responsibilities until all the lots are sold.

We bring experience to the venture and provide capital for acquiring the property and the homes needed to fill the vacancies.

Everyone involved will benefit. Alexander is gaining valuable experience that will benefit him throughout his career. Residents will see a reduction in their monthly costs. And, except for a small monthly maintenance fee, they will never again be faced with a rent increase.

With lower maintenance fees from reduced overhead, residents are justified in paying more for their lot. And, of course, Alexander and I appreciate buyers who are willing to pay us more.

About the Author:

Ernest Tew majored in real estate at the University of Florida and has been involved full-time in real estate investments since 1960. He has been actively involved in the acquisition, development, management, and marketing of more than $200 million worth of real estate.

He was president of the Gainesville, Florida, Board of Realtors in 1965, the youngest Realtor to hold the presidency at that time. In 1983, he was one of only seven in the country to receive the Academy Certified Exchanger designation from The Academy Network.

In 1989, he received the Golden Eagle Award, the highest award given by the Academy, for the creative way he structured the purchase of the 20 story Founders Tower office building in Oklahoma City, one of the best known landmarks in the state.

 
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