One of the ways to find "good notes" is to generate 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, they also have a downside.
You can purchase the individual home at wholesale, on a rented lot, and resell it at retail. The resale profits can be held on paper with some or all of your acquisition costs recovered through the down payment from your purchaser.
The yields on these of transactions can be quite high. I would not discourage you from doing them as long as you:
1. Take the time to learn what you are doing, as you would with any business.
2. Recognize that this paper is not real estate-secured but is UCC paper (chattel).
3. Understand that you must be able to carry the lot rent, insurance, utilities and other expenses if the buyer defaults.
4. Make certain that the lot owner or park management would allow the unit to remain on the lot
when bought or sold. Also check to see that they would permit you to rent the unit if you couldn't resell it right away.
5. Recognize that these units are often sold to less than first-class customers. Check your buyers/tenants out carefully, get an adequate down payment and be prepared to deal with significant repairs. Repairs can be very expensive and more importantly, they can delay the selling or re-renting of the unit.
6. Understand that while yields are high, the small size of each transaction severely limits the profit or cash-flow spread possible on each transactions.
7. Account for the value of your time. The fact is that in addition to your financial investment, you also have an investment of your precious time. You can attribute some value to the learning experience, but in small deals watch that your loss of time doesn't turn into a $5 per hour job.
To me, mobile homes could be a good part-time, weekend way to learn the business with minimum capital invested but with the recognition that you will probably want to graduate rather quickly. You might be able to build a little portfolio of these notes and sell them as a package to get operating capital for something larger.
For example, I am currently looking at several parks for possible purchase. In the process of evaluating a 29-unit park, a subtle curve ball came my way that you should know about. The most common method of evaluating commercial property is "NOI" or net return on investment (before debt service) where the term investment does not mean your cash into the deal but rather total purchase price.
In this case, there were 29 lots with lot rent set at $155 per month. Of these, there were nine shown as lot and mobile home combinations. These combinations were rented at anywhere from $175 to $425 per month. The total monthly rent for all nine mobile/lot combinations was $3,250. On the surface, that produces an income of $3,100 (20 X $155) plus the $3,250 for a total income of $6,350. Expenses were reported to be $906.35 per month. That leaves $5,433 per month net, or $65,323 per year. Based on an NOI of 10 or 10% return on investment, the property should be worth $653,230.
Here's the curve ball. If we examine the impact of the 9 rented mobile units, we find that the lots they are on at $155/mo. would ordinarily contribute $1,395/mo. (9 X $155) to the income statement. If we deduct the $1,395 lot rent amount from the $3,250 for the combined rents, we find that the mobile units without lot rent are contributing $1,855/mo. Annualized, that's $22,260 of income. On an NOI basis that says the rent from the mobile alone is adding $222,600 to the "value" of the park.
Would you pay $222,600 for 9 used mobile homes? Especially when two of them are 1989 and the rest are 1970's vintage junkers that you should have hauled away? The removal and disposal (what are you going to do with them?) would of course be at your own expense.
Clearly, if you evaluate the park with the trailers included you almost made a $200,000 mistake.
Moral: Always evaluate any business without inventory and then evaluate the inventory as a separate item. Obsolete inventory, equipment, parts and supplies are often used to pump up the reported value of a business. Don't fall for it.
If you were considering buying a note on the park, what would that $200,000 difference make in the loan-to-value? Somehow I don't think you or your investor would want that kind of money secured by those old junkers!
Del Ashby has been investing in notes and mortgages for over two decades. He is the author of the book "Make Money Trading Mortgages."
For more information about mobile home notes, read "Deals On Wheels" and "Making Money With Mobile Home Notes" by Lonnie Scruggs.
