Why Seller Financing Is Alive And Well In The Mobile Home Park Business

Prior to my first mobile home park, I had never heard of the concept of seller financing of real estate. I just assumed that all mobile home parks …

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Prior to my first mobile home park, I had never heard of the concept of seller financing of real estate. I just assumed that all mobile home parks had to be purchased using regular old bank debt. So you can imagine my shock when the seller said “I want $400,000 with $10,000 down and I’ll carry the balance. Not only was he going to carry the paper, but the down amounted to only 2.5% rather than the 25% that I would have thought to be the norm. My next four parks all followed this example, with down-payments ranging from 0% to 20%. My peers in other commercial real estate niches are endlessly dumbfounded as to how mobile home park buyers can pull this off. The truth is that seller financing is a win/win for all parties, and a very common element to this unique niche. For example, we recently entered into an $8.9 million deal in which one of the requirements was that the seller got to carry the paper, rather than get paid in cash.

Why is seller carry so common?

To engage in seller carry, the seller must own the property free and clear. The mobile home park industry is one of the few remaining real estate niches in which the original builders of the parks are still the owners. Most paid their mortgages off several decades ago, and are free to do what they want – including structuring financing in any manner they desire.

Why do sellers like to carry?

The financial benefits to seller financing are enormous. Let’s assume that you buy a mobile home park for $500,000. Let’s assume that you pay the seller cash. What happens? They pay taxes (let’s call it 20%) and that leaves them with $400,000 to invest. With current CD rates of 1%, that will net them a whopping $4,000 per year. However, if they carry the paper on the transaction, and you put 20% down, the numbers would be taxes of only 20% of your $100,000 down payment (you only pay tax as you receive the money), and then $480,000 at maybe 7% which equals $33,600 – that’s about $30,000 per year more in their pocket. Not a hard sell, right?

At least the loans have personal recourse, right?

No, that’s not common at all. We’ve done probably 50 seller carry deals, and not one has had any form of personal guaranty. Why is that? The seller is perfectly comfortable with getting the park back if you default – it was there’s already for decades and they know how to run it.

So what’s the downside?

There really isn’t any. Probably the only negative is what happens when the buyer does a poor job of due diligence. Such a buyer needs a second opinion on if the park is a wise investment, and someone to stop them from making a stupid deal. Often, the bank and the appraiser fits this bill. If you are not using bank debt – and even if you are – due diligence is essential. Benjamin Franklin once said “diligence is the mother of good luck”. Franklin would have made a good real estate investor.

When will this end?

The seller financing opportunity in mobile home parks will end when the sellers, who own them free and clear, die off. Since many of these mom & pop owners are WWII and Korean War veterans, that means that old age is catching up with them quickly. We think there’s probably about a decade left of seller carry transactions.

Conclusion

One of the biggest contrasts between mobile home parks and all other forms of commercial real estate is the availability of seller financing. This powerful tool can make or break the starting investor, and should be used when possible to make a good deal great.

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