Creativity is the use of imagination or original ideas. In the realm of mobile home park deals, creativity is essential. Thinking like a deal maker, rather than a deal killer, can turn potential opportunities into profitable ventures. However, there are limits to creativity in deal-making that must be acknowledged.
Overpaying
Overpaying for a mobile home park might seem manageable with creative financing, but there are pitfalls:
- Below Market Debt: Structuring a deal with below-market interest rates and terms might sound good, but the seller must be willing to carry the debt long-term.
- Upside Down Financing: If a property is worth $700,000, paying a million dollars only works if the seller agrees to carry the paper at very low interest rates for a prolonged period. Otherwise, refinancing becomes a problem.
Seller Financing with Conditions
Sometimes sellers propose creative financing structures, but these can be traps:
- Two Notes Approach: Dividing the sale into separate notes for land and park-owned homes might seem advantageous but could complicate releasing homes for sale.
- Collateral Issues: If homes are part of the seller’s collateral, you may be stuck renting indefinitely, which is not ideal for long-term ownership.
Zero-Down Construction
Zero-down deals can be enticing but come with hidden costs:
- Capital Repairs: While zero-down deals might seem like no initial investment, capital repairs can quickly add up. Ensure the needed improvements are manageable within your budget.
- Cosmetic Fixes Only: Zero-down deals work best for parks requiring mainly cosmetic improvements. Major repairs negate the benefits of zero-down.
Wrap Notes
Wrap notes carry specific risks:
- Due-On-Sale Clause: Ensure the seller’s existing loan doesn’t have a due-on-sale clause that could force immediate repayment.
- Minimal Investment: To mitigate risks, ensure your investment in a wrap note deal is minimal and manageable.
Seller Guarantees
Seller guarantees on occupancy and income can be misleading:
- Occupancy Guarantees: Promises to cover occupancy shortfalls are unreliable. Filling lots requires significant effort and capital.
- Legal Assurance: Secure a legal guarantee that seller payments will continue post-closing to protect your investment.
Recognizing Unsolvable Issues
Some issues cannot be fixed creatively:
- Illegal Parks: Parks without operating permits or those failing environmental checks are high-risk with no easy fix.
- Terrible Locations: Areas with no demand for affordable housing, poor school districts, or unsafe environments are difficult to turn around.
- High Density: Extremely dense parks require significant reductions in occupied lots, often not feasible.
- Private Utility Failures: Failing utilities, especially in areas with strict regulations, present insurmountable challenges.
Conclusion
Creativity in deal-making can transform underutilized parks into profitable investments. However, understanding the limitations of creative solutions is crucial. Some issues simply cannot be resolved through creative financing or structuring. Always balance creativity with practical considerations to ensure successful investments.
