Most real estate investors talk about all their successes and how great an asset class is while never talking about the challenges that come with it. Over the next 5 weeks we will be discussing 5 issues that we face on a daily, weekly, or monthly basis in our business that could cause a new investor to struggle or even fail while investing in manufactured housing communities.

           As I hinted in part 1 of my lecture series, there are chattel financing programs that allow you to finance new or used homes, so your capital is not drained by trying to put homes on vacant pads. Used homes can cost $30,000 to put on a vacant pad and if you have 10 vacant pads that can cost you $300,000 which could be the down payment on another property. Using these programs can be very beneficial as they will take the capital constrain off you but there are some issues we have run into that we wanted to make you aware of.

           We use the 21^st Mortgage Cash Program. There are other programs out there, but we have not used them yet (such as Triad and Northpoint). I would encourage all our readers to do their homework before choosing the 21^st Mortgage Cash Program. 21^st Mortgage is a sister company of Clayton Homes, which manufactures mobile homes. Clayton and 21^st Mortgage are both owned by Berkshire Hathaway which the Oracle of Omaha (Warren Buffet) owns. You can finance both used and new homes through this company.

           Let’s say you would like to fill a property up with new homes to try and upgrade the look and tenant base. We love the look of new homes and would agree with this approach. There are two options with the Cash Program. Option A is you are allowed to finance the cost of the home, freight, set up, and the skirting/steps/utility hook ups/HVAC with them. That means you can finance 100% of all the costs with them. The catch is the Cash Program forces you to finance the tenant through them. This means they must have a down payment of 5% if their credit score is above 600 and 10% if their credit score is below 600. For those of you that have parks with everyday working-class Americans, you will almost never find an applicant that has a credit score of 600. Always assume the 10% down payment. This is going to limit a large amount of your tenant base because while a lot of your tenants make enough to pay the monthly payment, they will never be able to put down the $4,000-$5,000 it will take to get into the home. The upside of this is the normal cost to finance a home through the Cash Program is $100 per month for every $10,000 of financed cost. This is going to alleviate the monthly payment because a $50,000 home will be $500 a month plus your lot rent which we will say is $300 a month. That means they can pay $800 a month for a $50,000 brand new mobile home. In most of the markets we see mobile homes rent for $750-$800. As well, the Cash Program has much stricter requirements for tenant screening than most park owners do. For example, felony convictions, drivers license, social security numbers (think about this if you are in a majority Hispanic population), valid proof of income (until you own a park you do not understand how many people never get paystubs/get paid under the table). The point being you will severely limit your tenant base by putting them through this process. As a park owner you must think about speed and cash flow. This option may limit both.

Option B is the Cash Program finances the cost of the home, freight, and set up, and you come out of pocket for skirting/steps/utility hook ups/HVAC. The Cash Program allows you to screen your own tenants and decide what down payment and monthly payment the tenant makes if you pay them directly. We feel this option gives you much more control over your tenant base and allows you to be nimbler if the market changes regarding your monthly payment you are asking for. Our normal “rent to own” brand new mobile homes require a $2,000 deposit and $1,000 a monthly for a payment.  

Some other things to keep in mind, the Cash Program charges 3 points for the origination cost on any home orders under 5 and 2 points on any order over 5 homes. The interest rate they are charging right now is 8.0%. You or your group must have a minimum net worth of $2,000,000 to be accepted by the Cash Program. Make sure to ask your representative about the calculations for the Supplier Fees and Carry Costs. The math behind these two calculations is very confusing and I would go into it, but I would have no one reading this by the time I got done explaining it. Always make sure your community is likely to be approved prior to relying on this program because they have changed many requirements since we signed up (minimum spaces, minimum number of vacant pads, quality of the property, area of the property etc).