Editor’s Note: Welcome to the companion article to Episode 7 of the MHP_IRL podcast! The purpose of this article is to expand your podcast listening experience with additional content. Companion articles will unpack larger concepts that we talk about during each episode that will give you practical and most importantly, actionable advice that you can apply to your MHP investing journey.
Closing on properties is a rush. Let me tell you...emotions are swirling - happiness, wonder, excitement, a little bit of buyer's shock, but there’s one emotion that comes before the rest - stress.
It’s all the little things that can and WILL go wrong, wrapped up in a ball, tied with a bow.
Take that feeling and multiply it by ten - that’s what closing on a mobile home park feels like. Closing on an MHP takes longer, costs more, and is more complicated than traditional real estate.
I’ve felt this and anyone I know who has closed on mobile home parks have felt like this. When closings get complicated I have to admit, Ian and I have thought about pulling out of deals.
But, there was one thing that kept us going when closings got tough. I had an endgame in mind.
“If you know your enemy and you know yourself, you need not fear the result of one hundred battles.” Sun Su, The Art of War.
Preparation is key. And, if you’re thinking about sending a letter of intent before addressing any of the following to-dos, here are some things to consider:
DEBT IS YOUR FRIEND
In mobile home park investing, you’ll rarely walk into a situation where you’ll want to sink all of your cash into a single deal. This means, debt is going to become a tool that you can leverage.
If you don’t have a background in finance, that’s okay. But, I would encourage you to sit down, do some research, and you’ll see from a returns perspective that it won’t make sense to take a property down all cash (unless you’re planning to put debt on it later).
It’s almost always going to work better for you if you diversify your funds - spreading your cash over multiple properties rather than one.
And here’s the thing to remember; it pays to be well connected. If seller-carrying isn’t an option, make friends with the bank (easier said than done I know)
Let’s look at a couple of scenarios:
Buyer A is looking at a property worth $2 million. Buyer A can work with a loan broker who has better connections and will do the heavy lifting.
Buyer B is interested in a property worth $1 million. While this isn’t a small chunk of change, Buyer B may have to work with local banks. The local banks aren’t going to do the heavy lifting, and in fact most of them will say no, BUT the one that says “yes,” will be an invaluable partner for Buyer B’s lifetime, even if they demand a recourse loan.
For those that don’t know, a recourse loan is a loan that helps the lender recoup its investment if the lender isn’t isn’t able to pay. Recouping could include seizing collateral and assets and deposit accounts. (This is important and will come up later)
Let’s just say that Buyer B and I have similar life stories whereas Buyer A and I are furthest from friends.
I remember working on my first deal. We called over 40 banks and every single one said no. I learned a lot, which made my second deal go much more smoothly (two banks said yes!) and since then that bank has helped us close deals quicker.
To tell you the truth, the latest acquisition I worked on only went through because of our relationship with the bank.
Buyer A’s approach demands the acceptance of the seller-carry ask, meaning sky high prices and terms that strongly work in the seller’s favor. This route is fine if you have the means, but I strongly recommend you get a lawyer to make the contract airtight.
EQUITY CAN BE A GAMECHANGER
Here’s what you need to think about when it comes to equity- strategy, risk, and returns.
Strategy: If your strategy is to grow big, you will want to have less of your cash tied up in limited non-liquid investments.
Risk: The less properties, the more concentrated your risk. Furthermore, a big enough calamity at a single property could shut down your whole operation if you’re too invested in one area.
Returns: If your cash is tied up in a limited amount of properties, your returns will suffer, even if you hit a home run.
Diversifying your cash AND bringing on passive investors such as family and friends may prove to be more lucrative for you and a better long-term strategy.
Let me take you on a little walk…
You have a group of family and friends who want to invest in a mobile home park, but want to be 100 percent passive in handling the management. You may see stress whereas I see dollar signs.
“Why dollars signs, Ryan?” you may ask.
Here’s my answer: You deserve compensation for taking on more of the workload.
Collecting payment can come in the form as an asset management fee, finder’s fee, promote structure, waterfall structure, etc.
I want to make sure I am always bringing in the most qualified people for the job, and that applies to investors, as well. The good thing...finding an investor is easy. It’s getting them to actually write a check that is hard.
When bringing on an investor, vet the individual or group very strictly and ask yourself:
Do I want more control or less control?
Does monthly reporting bother you?
Do you value quick decision making?
Is this investor willing to take on recourse debt?
What will happen if things go south?
Answering these questions will save you a headache and money in the long-run. I encourage everyone I meet to take this seriously because there are plenty of horror stories out there about how these situations go south quickly, and in some cases the law has gotten involved.
Right now, I know a high net worth individual that is suing a super successful MHP operator. If this operator doesn’t have his i’s dotted and his t’s crossed, this high networth individual and his lawyer will crush him.
Always consider your downside risk and ask yourself, “are you breaking the law?” Please, please consult with a lawyer before marketing to high net worth individuals. You don’t want to get mixed up in SEC litigation.
The good news is that you can structure a deal many many ways - the general partner route and the limited partner avenue.
The general partner aggregates and manages the investment opportunity while sources the capital from the limited partners.
The limited partners do not participate in the management of the investment and therefore have limited liability.
Here’s the deal: the bank needs a goat to go after if things go south.
If you have recourse debt and a low net worth that doesn’t satisfy the collateral requirements, you may not be able to solo GP the opportunity since the LP faces limited liability.
You need to come up with a list of people willing to accept the risk for you AND figure out how you can compensate them for going to battle if the occasion arises.
If you’ve not thought about this, pause on all of your lead generation tactics. You’ve got some work to do. The stress of closing a property will become a lifestyle of stress because you weren’t prepared.
COMPENSATION STRUCTURE IS IMPORTANT
No one is going to want to partner with you before ironing out their compensation structure. And if they do, run….because you’re in for a lifetime of migraines.
The good news is that there are TONS of ways to structure compensation including Finder’s Fees, Promote Structure, Waterfall Structure, and Asset Management Fees.
Finder’s Fee
A finder’s fee is cash or equity given up front for finding an investment opportunity. Finder’s fees can be structured in a lot of different ways. In my career, we have….
Received a five percent finder’s fee on the total purchase price for finding an opportunity
Gotten finder’s fees equal to the amount of capital we’ve put into the deal
Cashed out finder’s fees
Pushed finder’s fees directly into deal equity
If you’re sourcing the deal and putting in all this effort, you deserve to get paid.
Promote Structure
A promote structure is like an if/then statement in programming. Your equity is boosted a percentage if a certain return threshold is met.
For example, say you have 33 percent equity in a deal, but you have a promote structure that at time of sale if a 15 percent internal rate of return (IRR) is achieved, your 33 percent gets boosted to 50 percent.
Waterfall Structure
Don’t go chasin’ waterfalls' is not in my vocabulary, especially when it comes to the waterfall structure. It's more complicated, but similar to a promote structure. Additionally, this type of structure would be more applicable to a fund or a bigger deal. It is worth your time to model one out, even if you don’t go this route.
Asset Management Fees
Asset management fees can be structured in many ways, but typically a percentage of the gross revenue that’s agreeable to all parties involved is taken.
There are an infinite number of ways to structure a deal so make sure you know what you are comfortable with.
DON’T MESS WITH LEGAL
Winging anything to do with legal matters is a terrible, and I mean TERRIBLE, strategy. You do not want to be in the heat of the moment thinking about operating agreements, having closing attorney troubles, or rushing to find a title company.
Operating Agreements
Operating agreements are like seatbelts. You don’t put on a seatbelt because you plan to crash your car. You put on a seatbelt because of the other drivers on the road. Rarely do you ever need it, but are incredibly thankful that you have it.
With a solid operating agreement in place, you can avoid some minor and mostly major inconveniences.
Umbrella, LLCs
Depending on how you want to structure your business, an umbrella, LLC might be for you. Instead of saying, “Ryan owns 50 percent of AG X”, we say, “Ryan owns 50 percent of Archimedes Group, which owns 50 percent of AG X.”
This is all up to you and how you want to run your business, and it really comes down to your end game. My recommendation? Speak to an attorney or CPA to determine what the best fit for you is.
Closing Attorneys
Like anything in life, closing attorneys are not all equal. Just because attorney X comes at a higher price doesn’t mean they’re the best or even looking out for you.
As I stressed with banks, connections will go a long way here. Contrary to popular belief (or denial), sometimes it is all about “who you know.”
Title Company
If you’re a baby investor like I was, connections are few and few between. If this is you, you just have to grind through the list of local title companies until you get a bite.
THERE IS STUFF EVERYONE FORGETS
Closing on a property is like skydiving. You have a lot of things you need to remember, but when you jump out of the plane, your mind goes blank and instead of looking around at the sights, you blink...and you’ve already landed.
Between the time you jumped and landed (metaphorically speaking), you’ve forgotten to get an accounting system. Sure, Google Sheets is an amazing tool, but when you start adding complexities into the system, my recommendation is to find a proper accounting software.
And, while you were jumping, you probably also forgot to wave at the go pro strapped to your head. Just like how you’ve forgotten your due diligence lists.
In this line of business, you need to have checklists - not just because you need it, but because others like banks, the sellers, and anyone else will need it. The more seasoned you are, the more comfortable you are with making your own checklists. If you’re just beginning, don’t be afraid to check out as many free lists as you can. Find what works for you.
Closing a property isn’t just about closing. There is a process and an end game that all needs to work with what your goals are. If nothing, remember this - Fear is overcome with courage. Courage is overcome with confidence. And, confidence is created with preparation.
If you aren’t prepared, how will you win the war?