Podcast Episode #16: Mobile Home Parks and Risk!

Jason Sirotin:
I am here. I am doing it. We haven’t done a podcast in a while. We’re sorry for the delay, but today we’re going to jump back into Glenn’s book. Glenn, your book is cranking right now on Amazon. Congratulations.

Glenn Esterson:
Thank you. Thank you. I’m pretty happy with the amount of sales. I’m pretty surprised actually, by the amount of sales that have happened on that book. Actually just today, another review came out about it from a guy named George Allen, who’s an industry guru and well-respected, well-known guy. And he gave me, well, I’ll say a favorable review. George is a very straightforward-speaking man, and I appreciate his input and I’m pretty happy to get a positive review from him.

Jason Sirotin:
That’s so cool.

Glenn Esterson:
So, thanks to everybody out there who’s been buying the book because it’s definitely nice to see happen. It took a lot of energy and effort to write that book so I’m glad it’s being well-received.

Jason Sirotin:
Yeah, and it’s probably giving people a lot of power in the mobile home park space and helping them avoid all the bad stuff.

Glenn Esterson:
Hopefully.

Jason Sirotin:
Yeah, we’re going to be talking about that a little bit today as we talk about Chapter 7 of the book, which you wrote. It’s called The Mobile Home Park Manifesto, and you can get it on Amazon, and please leave a review if you check it out. But Chapter 7 is all about risk exposure and how to get comfortable with it. So, we’ve talked about due diligence and all that stuff a lot, but let’s talk about how people, when they’re getting into this space, view their risks and what they are.

Glenn Esterson:
Sure. When people are first entering the space, they actually don’t know what a lot of the risks are. There’s such a lack of information out in the market about how to understand all the risk associated when purchasing a mobile home park from a mom and pop that isn’t an institutional type of property that already has proper books and records, or maintenance logs and all that kind of stuff. And we tend to just look at what the seller’s giving us and say, “Well, I guess if that’s what he’s giving us, that must be all that there is to it. And he says everything here is fine and dandy. And the guy that he referred me to check this sewer and the water lines and the things also said it was fine and dandy. So, I guess there’s not much risk here to be exposed to.”
Obviously, that’s a very loosey-goosey type of definition on the risks there, that’s how people are looking at this thing. But the reality is, most people regret something they overlooked after they close the deal. There’s almost always something you didn’t bother to check on because you didn’t know what you didn’t know. And so, having a really well-thought-out plan for your due diligence from A to Z is going to be fundamental in your success. I’m doing a deal right now with a very large group, a national group on a deal in New York. And they’ve been such a pleasure to work with, but one of the things that they do is extreme due diligence. And I swear, I think that these guys have uncovered every possible stone while going through things, and yet, they’re still digging, looking for more unknowns and more red flags.
Now, these guys, they own a couple hundred parks and they’re major guys, so it’s to be expected they would have it like this, but they’re buying from a mom and pop. And for the mom and pop, the amount of due diligence that they’re having to uncover is kind of overwhelming, right? But if it was a local first-timer type of purchaser buying that, I bet you the due diligence list would probably all fit on one page and have maybe 25 questions, and that would be about what we typically see. It’s just not enough. You know, you have to go through the due diligence.
The biggest risk, and I’ve told you this before, Jason, the three biggest risks in this business are not so much property related, but really kind of municipality related, management related, and funding related. Those are some of the biggest risks in buying a deal. If you can get those three things covered before you even start digging in the deal, you’re going to be in a way better position to understand the red flags that you got to look for. The municipalities can have all sorts of information for you to go check on and look into and hear about, and what they would like to see to be done. And you should really dig into that. The books and records and the income side of things, that’s a little bit more straightforward, but in many cases there isn’t much recording happening either. So, the guy might say, “Well, hey here’s the rent roll. I don’t keep a separate bank account so it’s just mixed in with my family’s income and my wife’s income and all that kind of stuff.”
You’re going to have a hard time discerning what’s the real income here. So, that could be a big risk with that with a lot of these mom and pops. And of course, they’re not really reporting… I wouldn’t say all of them, but a lot of them aren’t necessarily reporting all the income to the IRS or all of the expenses. Typically you’ll see a lower income reported and a higher expense reported. So, you can’t really use the IRS tax forms necessarily, although ideally they’ll match up and that’s what a bank wants to see.
So, I can go rambling on and on and on about the various risks here that you got to be looking for, and I hope we dig into a few of these. But right out the gate, the big three, municipality, management, and funding. And then a very close fourth is understanding the income and expense streams and trying to verify all those out. And then right behind that is going to be the utility systems. And then right behind that, it’s going to be all the tenant vetting. So, a lot of risks, a lot of things to not look for when you’re not thinking about [crosstalk 00:06:29] before, so-

Jason Sirotin:
Yeah, it’s never sugarcoated. That sounds like such a bad business sometimes when you’re talking about it. It seems so challenging. There’s literally-

Glenn Esterson:
It really is.

Jason Sirotin:
… everything… What do you think drives people? Because the more and more I learn about it and I’m thinking about this risk, how do you get comfortable with that? And there are other things, right?

Glenn Esterson:
Well, the industry-

Jason Sirotin:
You’re not [crosstalk 00:06:57] with this. People make this decision for a reason.

Glenn Esterson:
Every day, multiple times people are buying parks. There’s a group that we just in the last three days have submitted four offers on deals that, hopefully they get all four, because they’ll close all four and they’ll run due diligence on all four at the same time.

Jason Sirotin:
Wow.

Glenn Esterson:
Once you have a system down, it’s a lot easier, but we’re talking about for the most part, a lot of these guys who are just getting into the business, maybe they have one or two parks. Maybe they have a due diligence list from one of the workshops that they had been through with some of the so-called gurus out there and stuff like that. And by all means, use that as a starting point, but it is no way the end-all, be-all. And every deal is going to have its own strange-

Jason Sirotin:
Exceptions.

Glenn Esterson:
… little things that you have to be aware of. What I’ve been doing and what I did when I was a buyer, and what I recommend people doing as they’re growing is, keep a running list of due diligence questions, wherever you can get… a broker sometimes has a list of due diligence items to think about, and these workshops, and the internet, these Facebook Groups, anytime you can find a due diligence list, print it out and attach it to your previous one, combine them together and keep that list growing, because that’s going to be something you’re going to want to know every single little check box that you need to go for, especially as you start going up the ladder and looking at maybe more complicated deals that have [inaudible 00:08:24] homes or private utilities, or maybe there’s some other aspect to it like RV or campgrounds. And you want to be able to ask all the right questions because it’s the stuff you don’t ask that’s going to come back and bite you in the butt.

Jason Sirotin:
Yeah. It seems like it’s around every corner.

Glenn Esterson:
It really is. It really is. If this was any other industry, there’s a lot of firms out there that specialize in doing third-party due diligence. In the mobile home world, in the RV world, it’s just not. I mean, there’s a couple of guys out there trying to do it, but by no means can they handle going around all the country and looking at all the deals people are asking, right? There’s no real system or infrastructure built for that yet. I think somebody might hopefully one day figure that out, because a couple of groups have figured out the management side so hopefully the due diligence side is next and it should make things a bit more streamlined and sophisticated, although it’s probably going to cost you a pretty penny. And most of the mom and pops are probably still going to want to do the majority of the due diligence themselves to save money and to feel like they’re learning what they need to learn.
So, for now it is, this is the hard part of the whole thing. The raising money, that’s not the hard part, the getting the loan, that’s not the hard part. I know I’ve told you guys that was the hard part, it’s not. Getting through due diligence and feeling happy about everything you’re doing and not having any buyer’s remorse after you close, that’s the hard part. And then keeping it, if you didn’t uncover some of these risks and then they pop up after you close, that’s a lot harder too because now you got to backtrack and try and figure out how to fund this thing you missed. And so, the risks could really start cascading from there. And you want to preemptively get in front of all that.

Jason Sirotin:
Yeah, and every time we’ve talked about kind of the negatives of the business, it always comes back to due diligence.

Glenn Esterson:
It really does. It does.

Jason Sirotin:
It always comes back. Because I was just about to be like, “Glenn, tell me the worst thing that’s ever happened to you.” And it’s probably the same thing because it’s all linked together with doing the thinking upfront.

Glenn Esterson:
Yup, absolutely.

Jason Sirotin:
And so, I guess it sounds like, just do not be lazy. Spend all of your effort upfront, otherwise you’re going to be paying for it for years and possibly with your livelihood.

Glenn Esterson:
Yeah, no, so there’s a group that I respect immensely and I’ve done numerous deals with them, and they’re a Southeast group, and in the early part of their purchasing thing, before I had any clue who they were, they bought a park, it was a non-conforming park, meaning that the zoning that it was built under is no longer really how the park is being ran so it’s running through a grandfather type of clause. And the city is one of those anti-MH type of cities, especially an anti-old park MH type of thing. And so, it was an all lot rent deal. There was no way that they could have known this when they bought this five years ago. I mean, there was a way, of course. They could’ve dug deeper and understood the risk associated, but they were anxious to buy a big deal or do their first deal and all that kind of stuff.
And so, now three years later, they were looking at replacing some of these older tenant-owned homes that some of the tenants had moved on and left their home and they were going to start replacing some of them. Well, they went into to go replace it, and they learned right out the gate that, oh, if you replace any home there, you’re going to trigger all the setbacks and then your park is going to have to be brought 100% up to code. And that’s exactly what they had to deal with. So, they spent the last year, almost $200,000 of going through this process for a smaller park, under 50 spaces, to redo it, essentially. And now they’ve gotten all the approvals and plans done. And so, now they have a horizon of two, three, four years before the city is not going to let those current tenant homes still be there.
They’re going to have to go through this process. So, they’re looking at selling their park and the number that we’re selling the park at is aggressive, but at the same time, the build-out, when you go through the process is actually going to be quite beneficial. It’ll be a beautiful park. All the landscape’s been approved, all that kind of stuff. And you’ll have about a 4X exit on the cash deployed to get there. But what a scary time-

Jason Sirotin:
This is a current deal?

Glenn Esterson:
This is a current deal, yeah. So, this was a risk that they neglected to understand thoroughly when they bought the park. And here they are nowadays, very smart guys, owns thousands of units, all that kind of stuff. And they need to carve this off now, or they have to go through the building cycle. The cushion is, it ended up being in an opportunity zone, so buyer’s going to be able to really utilize the tax losses here with the build-out and stuff like that. Then of course, you add the cost segregation factor into it and it’s going to become a decent deal for somebody. But if that happened to me, oh my gosh, that would have put me out of business, especially if it was one of my first deals.

Jason Sirotin:
Right.

Glenn Esterson:
I wouldn’t have been able to say, “Hey, well, I guess I have a diminishing return here, and I’m going to have to deploy a lot of money and then deploy a lot more money after that, just to re-stabilize it.” That would have been too hard for me, and I would be, “I guess I’m going to have to sell this thing, or I’m going to have to give it up.” Luckily they bought it for very cheap and a very good deal and they’re well capitalized now. But that’s a risk that is a real-time risk, these setback rules on these old parks when you go in and think, “Oh, hey, I’ll beautify the park and I’ll bring in new homes.” And you’re trying to just do good and improve things. And the city is sitting there just kind of waiting in the background for you to do something that can cause them to say, “Nope, you’re not allowed to do that, and we’re going to ruin your day now with all these new things you have to do.”
So, buyers really need to be cautious about that specific thing. And that boils into that municipality stuff I was talking about. When you go to the municipality, you need to be asking them about what happens if you want to replace the home, how would that affect your setback? Is there a process there? Is there a new thing coming downstream, that’s going to affect your park in some way or fashion? Is there a city sewer that’s going to be forced to hook up to at an individual per lot basis with the excessive tap fees and things like that?
So, municipality questions, that’s your first stop. That’s how you avoid a lot of these risks. You dig deep inside the municipality first and foremost. If you’re interested in investing in some town that you’re hot on for one reason or another, whether it’s a Miami type of location or whether it’s a Lumberton type of location, you still have to get into that office, make friends with those guys and figure out what’s coming down the line.

Jason Sirotin:
Yeah. When you’re established in the park and you’ve got all your bearings, you got through due diligence, you fixed all the things that you missed. How often should somebody be doing like a SWOT analysis, like a strengths, weakness, opportunities, and threats to be like, “Hey, these are the things that could be coming to maintain.” Is this something somebody should do twice a year, every quarter, every month? How quickly are things changing?

Glenn Esterson:
I would say it’s probably a smarter thing to at least do annually. Once you’re in it, you should have had a good plan before closing and feel pretty comfortable. And assuming you did everything you’re supposed to do, and everything’s running smoothly, now you’re the owner, you definitely got to sit back at least once a year and reflect on what’s been accomplished for this past year. What are the challenges ahead of you and what are the risks associated with those challenges, and come up with yet another plan to go through.
Whether it’s, “Hey, I’m just trying to maintain what I got,” or whether it’s, “Hey, there’s another 10 lots I might be able to bring online if I go through these steps.” And kind of figure all that out, because things change and rules change, and you should be protected by your grandfather clauses and all these other things when you own this thing for a continued period of time. But things change and sentiments change and municipalities kind of go a little left and then they go a little right, or they go harder right, or harder left. And you have to be able to navigate that, as it will potentially affect your income stream.

Jason Sirotin:
Yeah, but what feels good about what you’re saying to me is that it does, if you do it right, you set it up right, then it can be pretty passive, right?

Glenn Esterson:
Yeah, absolutely.

Jason Sirotin:
If you’re only having to worry about that once a year, and you’re just trying to grow your business, grow your investment-

Glenn Esterson:
Absolutely.

Jason Sirotin:
… it seems like once you get through all of the bullshit upfront, it’s kind of a sit back and just keep trying to maximize-

Glenn Esterson:
Yeah, once you have the management figured out, okay, and assuming you’ve already gotten through all this stuff, and now the management’s in place and they’re trained well, they know how to rent units, they know how to take maintenance orders, they know how to deploy the maintenance men, they know how to collect the rents. Maybe you have everything all set up so the billing is all taken care of automatically and stuff. This business can easily become a true cashflow machine where it’s a passive investment. But it takes real thought process getting to that point because you have to really think through all the different people that need to be in place. You’ve got to get them trained properly to do it right. And that’s easier said than done.
But there’s thousands of guys in this industry who do not sit at each park every day, trying to worry about this, that, or the other. They got a whole team set up so they’re able to go find new deals and raise more money and buy another deal, put a new team in place, get them up and running, and then rinse and repeat. And when you finally get enough of that going on, you’re going to see, “Hey, wow, I have a machine here that actually doesn’t require all my time to do something with.” That’s what’s most attractive about this business, is that it really can become a very passive cash machine.
Once you get all the ugly fixed, and you get all the tenants put into permanent placing and you have a long-term tenant base at this point, and you’re just growing your rents at 2% to 3% a year, or every couple of years you take a new little bump or whatever it is, you’re going to have a very steady stream of income coming in. And that’s what makes this business so attractive. But boy, all the stuff to get to that point, I cannot understate it enough. It is not easy to set up that system. But once you get it set up, your life gets a lot easier.

Jason Sirotin:
Yeah. God, now you pulled me back in. Now I’m like… I get scared-

Glenn Esterson:
Right.

Jason Sirotin:
… and then I feel okay. You give me that information hug. Yeah. So, one of the things that I’ve been thinking about a lot is, how do I vet a management team? In terms of property managers, what are the things that I should be looking for?

Glenn Esterson:
Sure, sure. If you’re buying a park that maybe is a smaller park, you’re going to be a little limited on your management options, okay? But let’s pretend you’re buying a park that’s maybe 100 spaces and you’re getting $300 or $400 lot rents. You’re going to have enough money in that cashflow to pay a real manager. And typically a real manager who knows what they’re doing and is licensed and can handle all the day-to-day stuff is going to cost you somewhere between $40,000 and $50,000, depending on where you are in the country. In other cases, it could cost you anywhere from 5% to 10% of your revenue stream, depending on the size of the deal. But it usually kind of maxes out around 50 grand.
You might need a second person to bring online to help support that first person. And you’re definitely going to need a maintenance person or two that are maybe one full-time and one part-time type of person. And so, the management side of it is challenging, especially in today’s market where unemployment is 3%, three and a half percent or whatever it is. So, finding the right people can be a challenge. And you’re most likely going to have to develop the right person. Certainly you can go poach from another successful mobile home park and offer a better wage or whatever, and see if they will come over. But building up from the ground is not the worst idea, and training the people the way that you need them to learn your systems and how you want them to behave and operate. It will pay off for you.
Use [Mosey 00:21:54] as an example, in my case, who by all standards would not have ever been allowed to be a property manager considering his background, and just all of that. But for me, he was such an honest person, despite how intimidating he may have looked, and his background, that after a couple of months of working with him he understood exactly what I needed him to do at my park and exactly how I wanted collections to be handled and maintenance to be done and reported and all that kind of stuff, he was a gem. He was great.
And so, you can find very cheap management sometimes. In that case, all it cost me was free rent, and then I let him keep late fees and then I gave him some bonuses, and when he rented units, I’d give him a little commission, but still nowhere near 10% of my revenues. And he did a great job. When he passed and I had to find somebody else to do it, I scrambled hard and there was shysters. I had one guy who claimed after working at the park for a month or two, that I sold him the park and went and collected all the rent.

Jason Sirotin:
What?

Glenn Esterson:
And took off out of town.

Jason Sirotin:
That’s so awful.

Glenn Esterson:
I was out 3,000 or 4,000 bucks that month. I was like, what the heck? Never saw that guy again. But eventually I found, as most people will find that there’s a lot of really good local realtor type of property managers that are licensed for real estate sales and for property management. And they often do a pretty good job and they just need a little bit of guidance and education on how you want things done. And they they’ll cost you 10%, almost all the time for these smaller parks, but money well-spent. And when you get up to a level where you have numerous parks, you would hire some of these third-party management companies to oversee the on-site people and to oversee all the books and financials and stuff like that too. And then that will typically cost anywhere from another 3% to 5%, depending on the size of the deal as well.
So, a well professionally managed park with a few hundred lots, you could easily be spending a couple hundred thousand dollars a year in management, but I think it’s money well-spent at that point. The guys who get screwed off are the guys with the big parks and the mom and pops that to see some person that has semi-decent credentials but no licensing and says that they can do this. And after a few months, or a few years of being there, they get comfortable enough to understand the systems. And maybe they’re doing an okay job, but they often say, “Geez, that’s a lot of money he gets every month. I’m sure he wouldn’t notice if some of it didn’t show up, we’ll just say that the unit was vacant.” And things like that. That happens a lot.
There’s a client of mine who, he had an employee who over a few years took $300,000 from him. Now she’s going to go to jail and stuff, but he’s not going to recover that money. You know? So, you got to have that end really figured out. Don’t just take the first person with a pretty face and a good talk about how to be a property manager. You want to really vet those guys out, just like you would vet anybody else out that you’re doing business with in your park.

Jason Sirotin:
Man. Yeah, that’s really good to have somebody… That’s what makes it passive. If you don’t have them, you’re kind of screwed.

Glenn Esterson:
Yup. Yeah, if you don’t have any [inaudible 00:25:34] yourself, you’re not going to have a lot of free time. Or if you end up having a lot of free time, you might not have the nicest looking park. So, it’s definitely something you got to pay attention to. Like I said, municipality, management, and then the funding. And then you should be able to start looking for a park. The funding is kind of a chicken and egg thing with these parks too. And so is the municipality, so you kind of have to have some foresight as to where you want to be and kind of have an idea that you’re not just going to be meeting with every municipality around the country, trying to find a spot. You want to kind of narrow that down because then you’ll be able to find your managements once you’ve narrowed it down. And then you’ll start finding some lenders that will lend in that area, assuming you’re credible and things like that.

Jason Sirotin:
I like the journey that we went on because I went from not being comfortable with the risk to being comfortable with it, which is what the chapter’s called. So, it’s very fitting. Thank you for all of the information today. If you want to learn more and dive deeper into risk exposure or any of the other topics we’ve discussed, or we’ll be discussing this show, you can go to Amazon and buy Glenn’s book, The Mobile Home Park Manifesto. Please buy it and leave a review. We really appreciate it. And if you want to get ahold of Glenn, you can call him directly on his cell. Glenn, what’s that number?

Glenn Esterson:
423-483-0492.

Jason Sirotin:
You can visit Glenn online at themhpexpert.com, and you can email him at [email protected]. Glenn, I got the email address-

Glenn Esterson:
Actually the email-

Jason Sirotin:
Yeah, I was like-

Glenn Esterson:
The email is gesterson.

Jason Sirotin:
Gesterson, sorry. [email protected].

Glenn Esterson:
You’d figure after this long and having helped create the email that I would actually know what the email address was. Next week, we’re going to be talking about cap rates and what they mean and what they should mean to you as somebody getting into it. On behalf of Glenn Esterson, I’m Jason Sirotin. Have a great day.