When you put a mobile home park under contract, you should have a stipulation in the contract that will allow you to confirm what the seller has said and to evaluate the overall feasibility of the purchase. Due diligence should involve looking at the physical, economic, demographic and market feasibility of the project. This time period should usually take between 30 and 60 days.
In conducting your due diligence, you are looking to identify anything about the mobile home park that poses a potential issue that you are able to change or fix. These issues usually deal with the cleanliness of the mobile home park, mismanagement, lack of rule enforcement, collections, expenses that can be reduced, etc.
But more importantly, you are looking for problems that you may not be able to fix or that would be expensive to fix. These types of issues usually deal with the size of the lots in the mobile home park, reputation, problems in the local market, flood plains, drainage problems, poor configuration of lots, water, sewer, electric and gas line problems.
In conducting your due diligence, you may call on experts in surveying, accounting, marketing, financing, plumbing, electrical and legal fields.
You should put together a list of questions, and you should evaluate the information you receive from the seller and compare it with the information you receive from outside sources.
Top 10 Most Important Due Diligence Items:
1. Hazardous materials: Don’t even consider buying a park without having a Phase 1 environmental study done. If there are any underground storage tanks, aboveground storage tanks, chemical drums, buried waste, lagoons, stained soil, gas pumps, auto repair shops, electrical transformers, etc., you may be liable to the U.S. government for millions of dollars in cleanup costs. If the purchase includes mobile home units that you intend to rent out, you will also want to make sure that they do not have asbestos. Law firms like Baron & Budd have made a living helping tenants sue their landlords over asbestos.
2. Proper licensing and zoning: Find out if the mobile home park is required to be licensed; if so, make sure it has the required license, which may be issued by local, county or state authorities, or even the state’s board of health. You should also make sure that the park is operating in compliance with the license. If a park has 50 units but is licensed for only 25, you may have some problems. Some cities have laws that state that if a certain percentage of the homes in a park that has “grandfathered” zoning are destroyed, those lots will not be allowed to be rented again. Lots can be destroyed by fires, tornadoes, hurricanes, etc. Check the local codes.
Zoning: Does the zoning permit a mobile home park at that location? Is the park operating under “grandfathered” Zoning? Also check out mobile home subdivisions with vacancies, the age a home must be to be moved into the county, and the entire mobile home and park code of the county the park is located in.
3. Flood plain: Is the park located in a flood plain? If so, when was the last time it flooded? If the park does flood, are the homes high enough to remain undamaged? Do the homeowners have flood insurance?
In most cases, buying a park in a 100-year or 500-year flood zone is acceptable. However, you should definitely understand the risks involved. There have been some park owners that have lost their parks because of constant flooding. In my experience, a 100-year flood plain in San Antonio,is much different than a 100-year flood plain in Kansas or other Midwest states. If you move ahead with a park in a flood plain, it is important to find the history of flooding for that particular piece of property.
Other drainage problems: It is advisable to know how a mobile home park drains after heavy or sustained rains. Even if the park is not in a flood zone, it can have problems with standing water and puddles. Getting rid of the excess water can be costly and difficult.
4. Water sources and lines: If you are buying a mobile home park serviced by city water, then you are a step ahead. If the park you are buying has a private water system (wells), then you need to evaluate those wells for quality of water as well as their capacity. Also, don’t forget to check the license for the well to make sure the park does not have more spaces than the well is licensed to handle.
Whether the park is on city water or wells, you need to check out the distribution systems. Find out what the lines are made of, whether there are signs of water leaks and whether the water pressure is adequate to all sections of the park.
5. Sewer and sewer lines: Once again, if you are buying a mobile home park with city sewer service, you are a step ahead of the game. If the park you are buying is on septic, a private sewer plant or lagoon system, you will need to evaluate that system. Get an expert opinion to help you in this process. I have made the mistake of not doing this in the past and it ended up costing a couple hundred thousand dollars to replace the existing sewer plant.
Some of the important items to evaluate are what the system costs to run, what upgrades have been made, whether it is running at full capacity, whether it requires a licensed operator, how many hookups it is licensed for and what alternatives are available if the system fails.
With the actual sewer lines themselves, the biggest problem tends to come from the old clay tile and thin-walled plastic pipes installed many years ago. These types of sewer lines can collapse and develop clogs because of the intrusion of tree roots. You may be able to have a camera check out the pipes and you could have them professionally blown out with high-speed water jets as periodic maintenance.
6. Electric service: With electric service, you should determine whether the electric is aboveground or belowground. If aboveground, you will generally be responsible for the main electric poles, so take a look at the electric poles to see whether they are rotting near ground level. These can be quite expensive to replace.
Another potential electric issue is that most of the homes now require 100 to 200 amp service. Many of the older mobile home parks have 30 to 50 amps service. This will usually require an upgrade, which will typically cost $500 to $800 for parts and labor.
A final note on electric is to check whether the electric is billed directly to the residents, which is preferable, or whether the park is on one master meter and submeters the electric to the residents. This is referred to as submaster metered.
7. Gas service: With the gas service, you may have natural gas, propane or some type of heating oil. The preferred service, if available, is natural gas that is individually metered by the utility company to each resident. This will usually pass the responsibility for the gas meters on to the utility company. If the gas system is a submaster metered system, watch out: You will typically be responsible for the gas lines and meters, and if the system fails, you will be faced with a large repair bill. If you are responsible for the gas meters and lines, you may want to have the system pressure tested, as a small gas leak can cause your service to be shut down until it is located and repaired. It is also a good idea to have this done routinely to avoid potential problems.
8. Lot sizes: One of the biggest issues with older mobile home parks is that they were built for 10 to 14’ x 50 to 60’ homes. As most of the newer homes are 16’ x 80’ and bigger, this can become a real issue when replacing homes or filling vacant lots. In addition, some cities and counties are requiring homes to be a certain age. Thus, moving an older 12’ x 50’ home into your park may not be an option.
9. Roads: The roads in a mobile home park are one of the big ticket items that you will face. Find out whether the roads are in good repair, whether they need to be resurfaced, whether they are wide enough, whether there are speed bumps, etc. Roads that are not maintained are often one of the most common complaints you will get from your residents.
10. Profit and loss verifications: This is where you will evaluate all the numbers the seller has provided you with and rework them to show the true picture of how the park will operate financially under your ownership. Go line by line and verify everything you can. This item of due diligence is so in-depth that it requires an article in and of itself; look for that article to be forthcoming.
Final note: After you have the mobile home park under contract—not before—and after you have the owner’s permission, you should go interview some of the residents. In many cases, this step will open your eyes to most of the problems with operating the park. For example, if the water pressure is inadequate, they will tell you so. If the water is turned off every week to fix water lines, they will tell you. Residents are a great source of information about drainage, utility, crime and other problems.
When doing your due diligence, there are some things that you just cannot change, and the risk will be too high to proceed with these deals. Other fixes may simply prove to be too costly. In other areas, due diligence may discover smaller problems that you could change with proper management and operations—these can lead to quick equity increases.