One way to find “good notes” is to create them through business transactions of your own. The mobile home business has been touted as one good way to do that. As with most things, it also has a downside.
How mobile home notes are created
You can buy an individual home at wholesale, on a rented lot, and resell it at retail. You can carry the resale profit on paper, recovering some or all of your purchase cost through the buyer’s down payment. The yields on these transactions can be quite high.
Seven rules before you start
I wouldn’t discourage you from doing these deals, as long as you:
- Take the time to learn what you are doing, as you would with any business.
- Recognize that this paper is not secured by real estate. It is UCC paper.
- Understand that you must be able to carry the lot rent, insurance, utilities and other expenses if the buyer defaults.
- Make sure the lot owner or park management will let the unit stay on the lot when it is bought or sold. Also check that they would let you rent the unit if you couldn’t resell it right away.
- Recognize that these units are often sold to less-than-first-class customers. Check your buyers and tenants carefully, get an adequate down payment and be ready for significant repairs. Repairs can be very expensive and, more importantly, can delay reselling or re-renting the unit.
- Understand that while yields are high, the small size of each deal sharply limits the profit or cash-flow spread on each one.
- Count the value of your time. Besides your money, you are investing your time. Some of that is a learning experience, but in small deals, watch that it doesn’t turn into a $5-an-hour job.
To me, mobile homes can be a good part-time, weekend way to learn the business with little capital, as long as you recognize you’ll probably want to graduate fairly quickly. You might build a small portfolio of these notes and sell them as a package to raise operating capital for something larger.
The curve ball in valuing a park
I was evaluating several mobile home parks for possible purchase, and on a 29-unit park a subtle curve ball came my way that you should know about.
The most common way to value commercial property is by net operating income (NOI): the net return before debt service, measured against the total purchase price, not your cash in the deal.
This park had 29 lots, with lot rent set at $155 a month. Nine of them were listed as lot-and-home combinations, rented for anywhere from $175 to $425 a month. Together the nine combinations brought in $3,250 a month.
