Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
This week is about investors working together with mobile home park owners and mobile home buyers.
Question. Gustavo from the Washington D.C. Area writes: Fellow investor here. What do you recommend regarding buying MH where they want only owner occupants?
Answer. Hello Gustavo. First, I want to make sure we are on the same page and that your use of MH is referring to mobile homes in parks owned by someone else. With that in mind, it’s assumed that the owner of the park has a rule in place against allowing renters to occupy homes in the park. This presents several problems that you might want to avoid. First, if you own the mobile home but the dirt and utilities are owned by a park owner, you will have a third party in all of your rental agreements (you + park owner + tenant). This by itself is going to complicate your business in ways that might not be worth the troubles. You could possibly challenge the park owner legally about excluding renters. But that would just make your business life all the more frustrating. If that’s what you’re considering, you need legal advice rather than suggestions from this column. Fortunately, there are a couple of other options you can consider.
Rather than buying and renting out a mobile home, you might think about investing in it to sell using owner financing. Either way, you need to have the investment capital to make the original purchase, which you probably have. There are some big advantages to owner financing in this situation. First, it complies with the park owner’s desire to only have owner occupants. Second, you are off the hook for assuring tenants comply with other park rules. Third, you’re not liable to maintain the mobile home nor the park grounds that it occupies. The list of advantage goes on and really is extensive.
You also have several options on how you structure seller financing. It’s a private contract so as long as you comply with basic contract and consumer laws, how the contract is written is only limited to your creativity and that of the buyer. With that said, there are legal issues that you want to take into consideration. As an investor, you’re legally considered to be more sophisticated about these types of deals than an end buyer who is considered a consumer. There are portions of the Dodd-Frank Act that influence owner financing transactions. You’ll probably want some legal advice but it shouldn’t be nearly as costly as challenging the park owner’s right to exclude renters.
What you want to do is put on a different business hat. With seller financing, you’re a lender rather than a landlord. Instead of security deposits, background checks, and referrals, your bigger concerns are with your sales profit, down payment, credit ratings, interest rate, being in first position on the title, and the length of the mortgage. Of course, there are other considerations but those are among the biggies. On the upside, a down payment is going to be substantially more than a deposit and nonrefundable. A big part of the win-win with seller financing is that you should expect a large profit on the sale. Unlike a landlord, a seller financed contract might run for 10 years and at the end of it, your income stops. But in exchange for that, you collect interest without the cost of maintenance and repairs. There are also tax implications to understand. Altogether, this is worth considering if you want to get into the mobile home investing sector.
There is another possibility that could be a compromise with the park owner. That’s a lease with the option to purchase. The up side here is that you can shift much of the maintenance and repair costs to the buyer although the park owner might want to ultimately keep you on the hook for these. However, a park owner might be open to this because tenants in a lease option arrangement typically act more like owners than tenants. As an investor, an advantage for you would be recovering all of your capital in a shorter amount of time if the purchase option is exercised. It also makes it easier for you to evict tenants if they fail to pay the rent (compared to foreclosing on buyers). Another advantage for you could be a larger group of potential buyers if you keep the option fee less than a down payment.
Gustavo, I hope these suggestions give you some things to think about. Undoubtedly, you’ll need to do more research and possibly seek legal advice. However, both you and the park owner are investors. Between the two of you, you should be able to creatively find a win-win solution.
Please comment with their thoughts, experiences, and other suggestions about mobile home investing. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].