Steve Murden finances mobile home parks
NuWire: Can you explain to me what some of the differences are between mobile home park financing and your typical [single family home] investor financing?
Murden: Mobile home parks are financed as commercial property rather than residential, so we are more interested in the asset and how it is performing over the owner most of the time. We are evaluating occupancy levels, pad rents in the park and in the market, the make-up of the park, density of park-owned mobile homes, whether it has paved streets. All of these factors are important in determining how much we can loan on a park along with the operating expenses and the cash-flow stream.
NuWire: What are the most important factors that you as a lender will look at in financing a mobile home park?
Murden: The number one thing we look for is what the park is generating in income…we see a lot of parks with multiple income streams. There may be a combination of pad rents, single family homes on site, small apartments or self-storage. We look at all of the income that is considered real estate, then work the expenses into our analysis and make sure the deal makes sense based on the market and the net operating income.
Typically there is better financing for loans at a half a million dollars or more in loan amount....We finance parks all the way down to $100,000, but whether there are paved streets, city or county utilities versus well and septic, whether the homes are taxed as real estate and permanently affixed to the site. There are a variety of factors that go into determining the type of financing we can provide.
If I had to pick the most important factors, occupancy level and the density of park-owned homes are huge. Filling vacancies can be a real issue in the park business because there is little financing for folks that want to go out and buy a mobile home from a dealer and put it into a park. Park owners have had to go out and buy repo or new units to populate a park, and this can affect available financing if the ratio of the units owned by the park exceeds 25 percent of the total pads. We are able to finance these deals, but the terms are not as favorable.
NuWire: Would you say that lenders look at the borrower or the property more in making their decision? And if you can also talk about the debt-to-income requirement for the borrower, that would be great.
Murden: The property is number one because that’s our collateral. The client is certainly important. We’re looking for a good credit score...680 middle score or better is our typical client, assets to cover the down payment and some reserves in the bank after they close....The more assets they have, the more...we are able to get a higher loan-to-value, to stretch our limits a little bit if we’ve got a really strong buyer behind the asset.
So...we look at both of them, but we look at the mobile home park primarily. This is what is driving the deal...that drives the value, the income stream, and a lot of times we do deals where if we have enough income from the park to cover the debt service at a decent level, we won’t even ask for the client's tax returns. It’s not a true stated income program but that’s just one of our programs that we do that won’t even look at the income from the buyer; we’re just looking to make sure that the income will cover the debt on the asset.
Debt-to-income really doesn’t come into play very often. We have a couple of programs where we use this ratio. It is not used in analyzing the property itself; it’s only used when the property will not cover the debt on the underwritten net income. Many times we have parks with a high density of park-owned homes where the purchase price does not make sense if we just use the pad income. We add the income from the mobile homes to the client’s personal income and use a debt-to-income ratio from this total income and if the client has a high enough credit score, we have closed loans with a debt-to-income ratio of as high as 80 percent. This makes the deal work where it would not have with just the pad rents. As compared to single family home loans with a specific debt-to-income ratio, we don’t use this most of the time with parks.
NuWire: Can you talk about the terms on mobile home park loans?
Murden: Most commonly we do a 30-year amortization. We have a program that will allow for the loan to be fixed for the full term, but most of our clients are choosing a 10-year or seven-year fixed that becomes an adjustable rate after the fixed period, but is amortized over 30 years.
The holding time…for these parks typically isn’t longer than seven or 10 years. Buyers are looking to purchase a park, generate the income and maybe increase the value of the park over this period of time and then sell it....This is a common scenario....But if you have a very large...200 or 300 pad park, well into the millions in terms of loan amount, we provide non-recourse financing at up to an 80 percent loan-to-value, fixed for up to 10 years and amortized over 30 years. The interest rates are priced off the 10-year Treasury, typically about 150 to 200 basis points over this index. Deals with loan amounts in excess of $2 million are eligible for this type of lending. When loans get below $500,000, interest rates start to jump up. We do loans as high as 90 percent loan-to-value if the numbers work. We have closed a lot of parks with this higher LTV. You may be paying a higher interest rate of close to 10 percent, but many times the return on the investment is very high. More typically, we are financing parks with 20 percent down, 30-year amortization and fixed for 10 years with a rate closer to 7 percent.
NuWire: Do you lend to LLCs and corporations, and, if so, does that change the terms?
Murden: No, it does not. That's almost standard in the industry...most of our clients are creating LLCs specifically for that property. They want to limit their liability to just the corporation or company that owns that property. So it's far different from someone borrowing against a single family home where most of those...won't allow them to put it in an LLC.
NuWire: Do you...allow for the investor to take a seller carry back in lieu of the down payment?
Murden: No, you cannot finance anything at 100 percent combined loan-to-value, that's just not allowed....Minimum down payment on anything we do is at least 10 percent.
NuWire: How long do they typically take to close?
Murden: You can close as fast as you can get an appraisal done. A lot of these parks sit in rural settings and so that's difficult to get an appraiser to turn one around in less than about three to four weeks, and we can usually close within a week of the appraisal coming in.
I would say our typical transaction takes about 45 days.
NuWire: How much would an appraisal cost?
Murden: On average a commercial appraisal for a park is running about $3,000.
NuWire: What debt coverage ratio range do you require the mobile home park to fall into...and what do you allow to be included for income?
Murden: Income is going to be the pads or any other real estate on the property. Single family homes, duplexes, fourplexes...self storage or any kind of commercial property they're renting. We're going to count anything that's considered real estate. We've had transactions where...some of the mobile homes were actually taxed as real estate, and we used the income stream in the appraisal from those homes in addition to the pad rents to value the property from an income approach. So that's a kind of unique situation, but in some states you'll see that, some municipalities you'll see that. So anything that really that's taxed as real estate...we'll use as income.
We'll have a debt service coverage ratio which means the net operating income [NOI] needs to be anywhere from 20 percent above the debt service....That would be a standard. And we have programs where we do...1.0 debt service coverage ratio where as long as the NOI is equal to or greater than the debt service, we're ok with that.
NuWire: Now, is there anything within that that can not be included, that you wouldn't consider?
Murden: Anything that's considered personal property, so when you have mobile home parks, if you have park-owned homes that are considered personal property...or chattel property and not taxed by the...municipality...the income strain from those are not considered in our basic underwriting if we're going to do it based on the debt service coverage type of loan. The only time we include the personal property income is when we are going into that debt-to-income ratio situation where we can't make it work based on just the pad rental income...minus expenses and we have to kind of throw everything in the mix to make it work. That is a scenario where we will consider some of the personal property but for a standard it's anything that's taxed as real estate that's generating income we'll take a look at.
NuWire: Is there anything else we haven't covered here that you think investors should know about?
Murden: Just in terms of evaluating a property and understanding that what the seller's asking for a property versus what we're going to value at can be dramatically different....It's not just a loan-to-value situation, it's...debt service coverage. It's everything that goes into evaluating that property and then coming up with a workable net operating income to cover the debt....So knowing as much as possible about that park from the seller is important...how many pads are in there, how many are occupied, what are the pad rents...getting a rent roll, getting a couple years of operating history to see...who's paying utilities...what are some unusual expenses in that park and just really knowing what we're dealing with.
