Editor’s Note: Welcome to the companion article to Episode 20 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.

You are your own worst enemy.

How true this phrase can be in the mobile home park industry.

Like any industry where decisions need to be made, smart people (really, really smart people) can make the dumbest mistakes.

How do I know? Because I’ve seen it AND I have experienced it.

From placing capital hastily to employing aggressive home sales strategies without proper information and even misevaluating the work it’ll take to operate effectively, it’s happened to the best of us.

Making these horrible, and sometimes detrimental decisions, happen for a variety of reasons, of which I’ll jump into during this article.

Always make this assumption: as said by Richard Feynman, the first principle is that you must not fool yourself and you are the easiest person to fool.

My hope is that you’ll learn from these bad decisions and avoid them like the plague.

Bad Decision #1: Believing in industry hype

Why is this industry so over-hyped? Time Freedom Dreamers and the Syndicators.

The number one reason I hear as to why individuals want to break into the mobile home park industry is this: “I want to quit my job because I feel stuck in it.” And further, these individuals have bought into a very very popular idea of achieving time freedom. Which don’t get me wrong is achievable, but these people have larger dreams than just operating a mobile home park.

The problem with this is it doesn’t happen immediately, and that causes issues long term because as much as people want to believe this industry is passive, it is not.

Now, you might be thinking the time freedom achievers are what is making the industry so hyped. While they are the overwhelming majority of individuals trying to break into the industry, the ones that actually affect price changes are the large scale syndicators, AKA people with big time money. These are people who go out, raise money, and look to scale up a portfolio.

Of course, there are small, medium, and large syndicators. And the larger ones affect the top level change the most. How?

Bad Decision #2: Executing macro strategies for micro properties.

The large syndicators have upwards of two hundred million dollars to place if not way way more than that. When you have that much money, you have options and pressures that other companies and individuals do not have.

As a large syndiator, lower cost of capital can get you into deals. You can outbid others while still making your returns. But it's more than that. I’ve spoken with several larger operators that say things like, “I’ll buy a four star property sub-four cap because I have a two star property that is hemorrhaging money, but FannieMae won’t refinance me so I’ll overpay and possibly even lose money on a nicer stable property and cram the lower, highly profitable property into that Fannie loan so I can refinance it more attractively.”

From a macro standpoint, that’s a clever play so long as that syndicator is achieving the returns that they need.

This is a micro play that a small to medium sized player can’t or won’t do. But here’s the problem with overpaying for properties that serve macro strategies. The word gets out. The sale price is then used as a comparison to other local properties.

Bad Decision #3: Using the wrong comparisons, which are the trickle down effects of the word getting out.

But these larger operators are buying huge nice stable properties, why would a broker or local owner ever use one of those properties as a comparison?

If you’ve cold called before or looked at a broker offering memorandum (OM) then that question should make you chuckle. Brokers and owners have the same goal...selling properties for the highest price.

I’d like to think that most owners or brokers on a two star asset will be rational enough to not use a four star property as a comparison but that’s not the reality.

But here’s the thing, you shouldn’t blame local brokers or owners, they want every penny they can get. Where logic should put those folks in their places, unfortunately, there’s more in play.

Bad Decision #4: Money has to be placed.

There’s a reason why Ian and I didn’t have a fund in 2019. We didn’t want to feel the pressure of having to allocate capital. I spoke to fund managers so desperate that they were nearly begging for deals.

Can you imagine convincing several people to write big checks on the premise that you are going to hit big returns and then you didn’t even place the capital? That pressure creates an environment ripe for psychological self trickery.

Here some real justifications I’ve heard:

It’s a high up front price, but I will appreciate it.
Industry consolidation will save me.
It's about my internal rate of return (IRR), not about my year three profit and loss (PNL).
It’s tertiary but the sub market is really strong and the demographics misleading.
We wanted all tenant owned homes, but we now know that that is unrealistic.
This is only a light turnaround so we can handle it.
It’s not our original thesis, but this opportunity makes us competitive.
We’re paying up to get a foothold in this market.
I’m comfortable only making a four percent return levered.
I know my assumptions are a bit aggressive but we believe we can achieve this.
It doesn't look good but we’re smart enough to figure this out.

To be fair, these phrases have zero context. The individuals responsible for saying them can’t defend their statements. But that’s the point - stripping out the context to separate logic from emotion is the only way to evaluate these decisions.

Smart people make dumb decisions all of the time. How? They add logic to emotion without even realizing that that is what they’ve done.

How does this apply to local brokers and owners using inappropriate comparisons? If you’re desperate to place capital, you may not initially agree with the value, but some will talk themselves into this. And, a market is what someone is willing to pay for a property.

The inappropriate comparisons become appropriate comparisons because people are buying the properties at those prices. Clearly, this is pressure to place capital, which influences bad decision making. But shocker, there’s still more at play.

Bad Decision #5: People play this game called social comparison.

Social comparison can make things complicated. People signal social comparison all the time by showing how much they own or by showing how busy they were at closing deals.

I personally made the mistake of believing others were just making millions of dollars, meanwhile I couldn’t find a deal to save my life. The truth is, as I started to unravel a lot of these signalers, I found that they were omitting some key details of what was really going on.

The point is, you can’t let what you think others are doing affect your business negatively.

What things happen to you as a result of social comparison?

FOMO (Fear of missing Out)
Competition (or rivalries), which in turn makes you want to win more than making smart decisions
Winner's curse, which is a phenomenon that occurs commonly at auctions where the winner will continue to bid beyond their highest and best due to fear of losing the deal or just getting caught up in the heat of the moment
Bigger is better has been a belief held throughout history. It’s quite literally littered with examples of why growth equals progress wound up meaning kings, dictators, and people of power losing after biting off way more than they can chew. Business is not exempt from this trap.
Scarcity mindset is about being attractive isn’t about having more. It’s about needing less. Feeling like you don’t have enough and that there aren’t enough deals going around will lead you to some bad decisions. I’ve been in touch with people who have bought properties 15 years ago for prices that aren’t even market today. Why? Because they thought those deals were drying up.
The do something syndrome is a productivity feeling. Warren Buffet once said that most people would be uncomfortable with the amount of money that he had sitting on the sidelines. Some people are just deal guys. Acquiring deals is really fun. It feels productive, but just because it feels productive doesn't mean it actually is.

Bad Decision #6: Underwriting because you’re being overly optimistic.

The culmination of these psychological traps is overly optimistic underwriting. The pressure to place capital, the fear of missing out, believing bigger is always better, or simply just feeling like you need to do something, can lead to you justifying low cap rates like triple lease cap rates, assuming infill can be done and within a very aggressive timeframe (shocker: it’s very expensive and time consuming and the used market frequently dries up).

This mindset can also lead to aggressive home sales strategies without home sale professionals or a strong market demographics suggesting the market actually has an appetite for more housing. This makes the first two to three years of your pro forma a complete blood bath, again with the assumption that you’ll eventually be profitable.

Now only that, but it can even extend to underestimating the variance of park owned home maintenance and deferred maintenance and additional workload associated with park owned homes.

Here’s the thing….

Everyone makes bad decisions. It really comes down to what lessons are learned?

I don’t recount these stories and pass along this information to scare you. In fact, it’s the opposite. I want you to learn from these individual’s past mistakes and come out on top.

The question you should be asking is not how could anyone come to the same conclusion other’s have? Rather, how do I avoid tricking myself?