What Is Really Included in the Purchase Price of a Mobile Home Park?

“Brandin, there is one thing that does not make sense to me,” Marie said as she looked up from the document in front of her.

“Yeah, what is that?” I replied.

“The purchase price of the mobile home park is $1,900,000, right? But you’re asking for about $1.5 million—why is that?”

“Yeah, we have a target to raise $1,576,000 because we’re using a loan and don’t need the full $1.9 million; we just need enough for the down payment and the other costs.”

“Okay, I can understand using a loan to purchase it, but how much are you expecting to put down on the loan then?” Marie looked confused as she asked.

“We plan on putting down just a little over 25%, which would equate to half a million, or $500,000,” I replied quickly.

Marie looked at me and bluntly retorted, “So that’s where you lost me. What then is the other one million plus for that you want investors to give you? It seems like the math doesn’t add up.”

“Oh, well, that’s for the other costs related to the deal. Did you see on page 3, the use of funds description? Where we lay it out?” I reached across the table and flipped the document to the page to point out the section I was referring to.

“Well, I saw it but didn’t understand why the numbers didn’t add up, and if I’m looking at it correctly, it means this property will require a total of almost $3 million invested, which is not what you told me,” she stated back to me.

As I sat there with Marie in the diner, she continued to dive into the most recent mobile home park syndication we were raising funds for. She had not invested in a mobile home park with me before, and a lot of the questions I usually answer are educational when meeting first-time syndication investors. Although she was quizzing me, and it may seem like she was trying to catch me in a lie or some untruth hidden in the deal, I understood it came from a good place of wanting to understand.

A lot of times, passive investors look at deals and fail to ask the right questions to the capital raisers or general partners. They look at return figures and cash flow projections but fail to examine the numbers that make up the capital raise or the total cash investment, which is what the returns are all based on.

Capital raising for a syndication has a lot of costs built into the funds being raised that go beyond the purchase price or the down payment. Although many passive investors, when they review the numbers, look to see if they feel the fees or costs are fair, I always try to get people to also consider whether they are reasonable and will be enough. I have seen deals where capital raisers don’t raise enough money, and the deal can fall into an abandonment issue, and I have seen deals that have way too many unnecessary costs built in.

So what is really included in the capital raise of a typical mobile home park? How did I respond to Marie when she wanted to know what the other $1 million plus dollars were allocated for?

“Marie, that’s a great question. I know it may seem like $3 million is not what I told you, but what I was referring to is the target raise of a little more than $1.5 million, which is how much cash we need to invest. But that is different from our total investment of $3 million into the community. Let me explain how we get to the $3 million or our total investment. It is more than just how much cash we put in. It is the purchase price, the fees to acquire it, and the capital reserves. So although we are raising $1.5 million, we are also taking on debt of $1.4 million, which then brings us to that almost $3 million total investment. If we go to sell the property next month, we will have to pay back the $1.5 million to our investors, like you. Then we must pay back the bank the $1.4 million loan.”

She nodded her head, which led me to believe she was understanding what I was explaining, then asked, “Well, you said the three million equals the purchase, fees, and money we are setting aside? And if this document says we only need the $500,000 to put down on the loan, are you telling me you want the $1 million to pay for fees and the savings money?”

“That is a great question, Marie, and yes, that is exactly what I’m saying. We need approximately $1 million, or to be exact, $1,076,500, to pay for the fees to acquire the deal and the reserves needed to complete the business plan. Then, if you add the $1,900,000 purchase price to it, you get the $2,976,500 or the $3 million figure we keep referring to.”

“Brandin, I know you gave me this document, and I did read it, but what I’m trying to understand is why you need so much money on top of what you need to get the loan? I don’t see what you have described in the repairs and projects totaling that amount. Plus, if I’m being honest, an extra $1 million is a lot to just let you have and keep in a bank account. I mean, who oversees that money? Is that standard?”

“Marie, I get it; it is a lot. Some of that money will be used for reimbursement of money we spent to set everything up and to purchase the deal, some will be our fee, and the rest will, yes, be set aside for use to improve the property. Other than my team and I, no one oversees the money on a daily or weekly basis. Now, you will get quarterly reports showing the use of the cash and the performance of the investment.”

I paused and thought about how she could feel more comfortable with what we would be doing on a daily or weekly basis with not just this investment but company-wide.

“I’m also very transparent on social media and with weekly newsletters you can subscribe to and follow along if you want to be more in the loop.”

Marie was flipping through the offering memorandum, or what I refer to as the deal presentation, I had given her. She had notes scribbled down all around the margins. I could tell she was interested in investing with us. We did need the investment she could provide, and I thought she would make a great partner. So I wanted to make sure I was open to answering whatever question she had so we could secure the investment. However, I felt she was on the edge and did not feel as comfortable with some of these numbers as I expected, given the detail in the document.

She looked up at me and asked, “I’m sorry, can you just explain to me the fees you’re charging and what that means to me, and if that is standard or not?”

“I can, but I would be hesitant to say what is standard or not, Marie. As you look at more and more of these types of investments, you will see people structure and charge different fees and have different levels of costs based on the deal itself. So let’s start with this number here and work from there,” I pointed at the section of the document covering the down payment and purchase price.

As I rotated the document around so we both could have a good angle to read through the list of numbers, I thought of a way I could break down not just what we are charging for this deal but what I thought could be reasonably expected on a majority of similar investments. I wanted to treat this more as a learning moment and less of a sales moment or attempt to minimize the impact of what we are charging or raising for this deal.

Purchase Costs

In this specific case, the purchase price of the property was $1.9 million, and I wanted to point out how we were buying it. Generally, you can buy the property with cash, a traditional loan, an owner financing loan, or on creative terms. Each method will result in different cash requirements. Understanding not just the price of the property but how it will be paid for and what the cash requirement is will be essential in analyzing if this investment is worthy of your time and money.

Down Payment

In our case, we were using a traditional loan and were going to put just over 25% down, approximately $500,000. This is only one part of the cash that will be required to purchase this property. However, the lower this number is, the better. I also like to look at how the down payment will affect the cash flow. The larger the down payment, the lower the monthly payment. There is a sweet spot between cash down and resulting debt payment. More down may mean more available monthly cash flow, but it may also cause the cash-on-cash return to fall, whereas a lower down payment may help your cash-on-cash return but will hurt and limit your available monthly cash flow.

Some people may see a flaw in that because as the park is improved, the monthly cash flow will increase while the monthly debt payment will stay the same, thereby creating a larger free and available cash flow for partner distribution. That is true, which is why I said there is a sweet spot for how much you are putting down and how much debt you should take on for each specific deal. The general partner should have most likely analyzed this to arrive at the return on investment being presented in the deal.

Security Deposit

The security deposit for this deal was only $10,000, which is the responsibility of the general partner to provide. It is our capital that is at risk. In this case, I was able to negotiate a favorable down payment since I knew I had other needs for our acquisitions company’s cash to acquire this deal.

This amount will be applied to the purchase price at closing. However, it will generally be reimbursed back to the general partner after closing with the funds that were raised for limited partners. Some general partners may use the security deposit as their “investment” or “share” into the syndication, while others will require that amount to be reimbursed so they can use it in the operation of their day-to-day business. In this case, we had shown that it is a cost we were going to be reimbursed for.

Capital Reserves

The biggest item on the list was the $835,000 for the capital improvements needed to implement our five-year plan to achieve the presented performance expectations. Capital reserves are one of the most underestimated line items on a deal presentation when acquiring a mobile home park. The park’s reserves directly reflect the expectation of performance and requirements to reach that performance benchmark. Many investors under-reserve to make the deal look good on paper. The problem is, for a limited partner, it is hard to know if the general partner is accounting for everything needed to realistically reach those rent rates or valuations used to calculate that presented ROI.

“That is a lot of money for repairs; are you going to use it all at once?” Marie asked.

“No,” I replied. “We will work in phases but work as fast as possible so the money is not sitting idle for too long.”

We flipped the page of the presentation document to the project timeline chart, and I showed her that initially, a lot of the costs were going to be taken care of immediately. Simple things like tree trimming, landscape clean-up, new mailboxes, and a new sign will typically be taken care of within the first six months of ownership. Surprisingly, those items can be quite expensive. For tree trimming, we had been quoted by multiple vendors between $35,000 and $60,000 to remove multiple dead trees, trees on top of homes, while also trimming and lifting the branches in the entire park. This park was 11 acres and fully treed, so it had a lot of work to catch up on from the previous owner’s neglect.

Understanding the costs and what is reasonable or considered an average cost for an area can be difficult for a limited partner. Simple questions can help determine if the budget will cover actual expenses. Has the general partner gotten actual bids? Has the general partner done this type of work previously? Are these costs in line with that, and if not, then why? If they answer no to both of these, then you must attempt to understand how they arrived at these “estimates.” It could be the sign of a potential issue down the road.

Longer projects, like infill and vacant home remodeling or selling, are usually what can be underestimated both in cost and in time. Personally, when I review other operators’ deals, I see infill costs below what is average or standard for the area, and I see timelines to rehab homes that may be too good to be true.

Often this happens because the sooner they “anticipate” these repairs and infill to be done, the sooner they can add that rent to the top line and show an increase in cash distributions to investors, thereby boosting the expected cash-on-cash returns and total return on investment, making the deal look more attractive when going to raise capital.

I showed Marie that although we had budgeted almost $360,000 for home repairs and infill, we also assumed much of that to start touching our income in year two, and really year three and after.

Roads and infrastructure costs made up the remainder of the improvement plan budget. It is hard to achieve market rents and a top valuation if your infrastructure and roads are crumbling beneath you. Roads, plumbing, electric, sewer, and pads are the very foundation of the mobile home park’s valuation. As a limited partner, you can visit the community, look at pictures, or request any inspection documents they may have to ensure these are being properly budgeted for.

“Thanks for walking me through that. I know you budgeted for a lot of stuff, but what happens if costs go up, or something happens you didn’t plan for?” Marie asked me.

She asked a good question because it does happen, so I was upfront, “Well, that means it will come out of cash flow and you will not get distributions. Or worse yet, and it could happen, as an organization we may have to do a capital call for investors to put in more money to complete what is needed.”

The look on her face was what was expected. “So you’re saying I could be required to invest more money?”

“A capital call is a very real thing that can happen, but that is why it is so important that the inspections we do and the bids we receive accurately reflect all known items needed.”

“Well, it was not what I wanted to hear, but it is good to know,” she replied with a touch of humor.

There was a pause while she thought of something.

“Brandin, you said this was $835,000 and the down payment was $500,000, so that’s what, $1.3 million right? Are you saying the other $200,000 is your fee? Isn’t that what you said before, the cash being raised was to pay for the down payment, the improvements, and the fees?” Marie pointedly asked.

“Yes, I guess you’re right, I did say that, but the quick answer is no. Let me explain, the $200,000 is not ‘our fee,’ but it is for fees to us and various other vendors and services. Often we refer to that as closing costs as well,” I answered candidly.

I reached across the table and flipped the page back to the breakdown of the use of the funds being raised. My coffee was empty, so I moved my cup to the edge of the table and made eye contact with the waitress to get a refill. We were not going anywhere anytime soon.

The final items making up the purchase of our mobile home park came down to the costs to close and the fees being paid out to us and third parties.

Closing Costs

The cost to purchase the deal can vary from state to state and deal to deal. However, there can be 1%-3% of closing costs in a deal for title fees. Title insurance, recording fees, lien searches, transfer taxes, and prorations will all be added to the total purchase price.

Here, we estimated about 1% for pure title costs, that’s $19,000 being set aside to be paid at closing from the capital being raised.

However, Marie was quick to point something out to me.

“Brandin, I know you just said the closing costs are 1% of the deal, and on this line, it shows a total of $104,000 for closing costs. Can you explain? The numbers are not matching what you are saying.”

“Very good point, I was about to get to that. Another item that is generally included on the final purchase and closing statement is any realtor or wholesaler fees involved in helping us acquire this deal.”

Marie nodded but said, “And they make almost $90,000? Doesn’t that seem a bit expensive?”

I replied back, “Not really, in this case, we had two people in front of this property. A referral from someone who knew of this park and had a connection, and the wholesaler who had this park under contract and was trying to sell it. He wanted $10,000 for the referral, and then the wholesaler who negotiated the terms and acquired the contract wanted $75,000. It was our choice to say yes or pass on the deal, and we analyzed it, and even with these fees, the numbers still worked, so we said yes.”

“If you think that’s fair, then okay, it just seems a lot to me.”

If I wanted to dive deeper into this, I would have said yes, it is a lot of money, but sometimes it is a necessary evil. Acquiring deals is not easy, not quick, and not cheap. Some wholesalers have full-blown operations and teams they must pay to bring us these deals. It can take months or even years of follow-up to get a mobile home park or RV park under contract. Not to mention they must negotiate favorable terms, and that’s not easy in today’s market. Referrals to someone with a deal are a bit much in my opinion, but no one forced me to say yes. I said yes to the terms under the arrangement that, IF the deal made sense and I would end up closing on it, I would pay the referral fee at closing.

When the deal is presented to investors like limited partners, all of these fees should be and are accounted for when presenting an IRR, equity multiple, cash-on-cash return, or total return on investment. I am a believer that if the numbers work and provide the returns we are looking for, then I am willing to pay two or three or even five people in between me and a deal. Is it ideal? No, but is it business? Yes.

So in my opinion, it is less about how much other people are charging us and more about whether this investment under the current structure and terms makes sense for my investment requirements and risk profile.

Other Closing Cost Fees

Once we circled back to the sheet, I began to point out that because we were using a traditional loan, we were being quoted a 1% origination fee and budgeted an additional $15,000 for this amount, which will be charged at closing. Sometimes there may be upfront fees taken from lenders, but in this case, the fee was being charged at closing.

If using a mortgage broker, there can be an additional fee on top of the lender’s fee. A general partner will know these fees when signing a good faith estimate with the broker while obtaining the financing. Although he can shop around or use preferred brokers and lenders, by the time the deal is at the capital raise, the terms are set and funding is typically secured pending final approvals and closing.

Insurance is another Cost that will be taken from the Capital raised. It will vary depending on the Mobile Home Park, but the initial premium payment will be needed prior to closing. Covering General Liability is essential, while adding on loss of income, hazard, and even the individual mobile homes are all items that can raise the cost of the Insurance Premium.

While getting into the details of insurance, loan terms, and lender fees may be out of scope for a limited partner determining if they like a deal or not, it is important to understand how the raised capital will be utilized. While it is also important to know the costs are accounted for and reasonable.

These fees are typically paid at closing, in which case, they will be paid by the syndication and added into the total amount of cash needed to close.

Third-Party Reports

Marie was laser-focused on the closing costs, and one item that gets mixed in there that I like to pull out and assume we will pay it outside of closing is the third-party reports. These can be the biggest chunk of your costs to acquire a property.

These can either be included on the closing statement or paid out of pocket at the time of service. If paid out of pocket by the general partner, these costs will typically be reimbursed from the capital raised after closing.

Appraisals

The cost for an appraisal will vary based on the size and complexity of the community. We have had appraisals as low as $2,500, but for this one, and a park of this size, we spent $6,000 on our appraisal. We had spoken to a few people who gave us some ranges for the area and felt confident our price was fair for a 78-lot community. We were told that smaller parks for this area would be between $1,500 and $3,000, but another investor said he had been quoted up to $8,000 for a large 100+ lot community.

I explained to Marie that this is generally out of our hands, and we can aim to pick the best one, but we cannot control the prices that appraisers charge and must pay the going rate.

Surveys

Not too different from appraisals in costs. There are boundary surveys and as-built surveys, which are pretty cheap, relatively speaking, between $1,500 and $4,000, depending on the size of the park and acreage. However, I pointed out to Marie that on this transaction, we were using a lender, and they would require an ALTA survey, which I was quoted up to $8,000 for. Those go far beyond basic boundary lines and can include encroachments, improvements, easements, zoning and land use, flood zones, as well as topographical details.

Surveys have an a-la-carte list of items you can add on to make them more comprehensive, such as mapping out visible utility equipment (e.g., manholes, water valves, electric transformers). Some add-ons may be lender-required, and others may just be good for you to know.

For us, we paid $7,000 for our survey. Pro Tip: Make sure you get quoted and included in the bid that you want the electronic file of the survey and three plotter-size hard copies. Generally, the surveyor will include this in standard pricing when asked upfront, but if you ask for this after the fact, they may charge extra. Having a computer file allows you to be able to send it to future surveyors or draftsmen if you plan on doing improvements to the park and can save you on future costs. Having paper copies comes in handy in the office if you are a tactile, hands-on person like me!

Marie stopped me from going on to the next category and asked, “Is that all of the charges for third-party stuff? Because you only covered about $13,000 worth of amounts, and you have here a number saying $18,500. What is the other five thousand dollars for?”

“Good point. I group in my inspection reports with that category as well. We have budgeted about another $5,500 for this one because we did not expect or incur anything more than that,” I replied.

I also went on to explain a little more detail of some standard items that we did incur and some that may occur on other deals to help give her a more well-rounded viewpoint of this category.

The seller had a clean Phase 1, and although the lender made us get an updated one, we were able to get that done at a pretty fair price—only $2,800—and the rest of the money was spent on some basic infrastructure inspections.

Now, this one is on city water and city sewer, so we had our plumber go out and scope a bunch of the lines to let us know the condition. We also walked the park with an electrician to look at our electric hookups on occupied and vacant lots, but otherwise, there was not a lot to inspect. We generally got a clean bill of health, with recommendations and some needed upgrades when infilling. However, nothing caused us major concern.

It is important to point out that this cost can go up if it is on private utilities. Inspecting a well may involve a more intensive and expensive effort to determine the condition of the pump and well system. A septic inspection can be costly. They can cost $200-$400 per pump and inspect each tank; it adds up pretty quickly. A lot of times, we would want to get on the phone with the previous well operator, lagoon, or wastewater treatment plant operator, and even the company that handled the septic servicing (or installs), to have a long discussion and get any back reports that may be available. In some states, the reports are handed to the state and health departments and may become available to obtain copies.

Third-Party Team

When we got down to the final numbers, she pointed out that we had lawyer fees and wanted to know what that was for. Did we need a lawyer to handle the closing, and if so, what was the title company for?

She was not wrong; lawyers can, and in some states are required to, close on real estate deals. However, in this state, we used a title company. Lawyers can also be used to review contract docs and closing documents, even if the title company is handling the “title work.” However, for this transaction, the lawyer fee was referring to the cost of doing a syndication. Many attorneys who specialize in this niche will charge $12,000 to $18,000 for a syndication.

It is a must-have, and no shortcuts should be taken when it comes to the proper documentation and filings with the SEC. We are selling shares of an investment and have certain guidelines, regulations, and time frames that must be kept in order to stay in compliance. Having a good syndication attorney on your team is key to being a successful general partner.

For this transaction, we had a cost of $13,500 for the syndication and entity creation. Each deal may have a different cost depending on the LLC and entity structure being set up. On top of this are also filing fees for the state for the creation of the LLCs.

These costs will be reimbursed back to the partnership after closing but will be paid out of pocket by the general partner while putting the deal together.

One thing I did not use on this deal but could be included in the costs to acquire a deal and to be reimbursed is a third-party due diligence team. These costs can range from $5,000 to $15,000 or more, depending on the complexity of the deal and what they are doing. Many operators on smaller or less complex deals do the due diligence themselves, but on larger transactions, it may be useful to have a well-versed team come in and ensure proper due diligence is being done prior to purchase.

Acquisition Fee

“Well, that still leaves almost $90,000. What is that for? I thought we paid the wholesalers and the guy that referred us the deal to acquire?” Marie pointed out.

“This is our fee. This goes directly to my team and me to pay us for finding, negotiating, inspecting, structuring, and operating this deal,” I answered.

“Is that a lot?” she responded.

“Well,” I said, “Generally, fees can range from 1% to 5%. I have charged and seen some go to 6-8% before as well. It is heavily dependent on the deal itself, the size, the terms, and price. Just like before, do the numbers make sense with this fee added in, is really what needs to be asked, along with, does this keep our interests aligned and on task to achieve our goal.”

“Don’t you charge other fees too?” she questioned.

“No, not really. For this transaction, we do not charge asset management fees, sale fees, refinance fees, or other fees. If we did, Marie, I would have it listed here. I’m not trying to hide anything.” I had said it pretty bluntly. I never wanted to kill a deal with fees but also want to make sure we are being compensated and able to run our business. An acquisition fee achieves that. Maybe one day as we scale, that perspective might change, but at our current level, this is how we structure the fee.

To my surprise, she asked, “Can you lower your fee? It seems high.”

“When just looking at the price outside of everything else, I can see why you would ask that. Although yes, I could technically lower it, I will not. Although the fee does in advance of operating the deal, we as a team have invested significantly into the transaction just to be able to sit down and speak with you today. We also have a long road ahead to achieve what we are planning. To ensure we have the right team in place and the right systems to make sure the investment you are looking at is sound and has been properly vetted is something that we cannot put a price on. Many of these transactions we do come from relationships and time that we have invested over months, even years, before this. The value is in what is being presented and offered to you. As I said a few times, the two big questions you must ask are: Do the numbers or returns work for your investment and risk profile? And do I feel the general partner’s interests are aligned with mine? I would even add a third: Do you feel or can you prove that this general partner has a track record and the ability to perform what is being presented? If you answer no to any of those questions, you should not invest, even if there was a $0 acquisition fee. But if you said yes to them, then the price of the fee is more than reasonable to be given that peace of mind and confidence in your investment performing as expected.”

I would be lying if I didn’t mention the silence that came after I said that. I know honesty is a good thing, but sometimes it can cut too deep for many people, especially when it comes to money. I didn’t say anything; she sat looking at the figures on the paper while holding her coffee with both hands clasped around it. Although it was only maybe 30 seconds, it felt like five minutes of dead silence.

Finally, she looked up. She tilted her head slightly to the left and nodded.

“Okay, I understand where you are coming from. Now, what about this?” she asked while she flipped the page a couple of times and pointed to another chart in the presentation.

Investor meetups are part of the role of a general partner, whether in person, on a Zoom call, or a phone call. Meeting and discussing deal points and terms is part of the investment process, and there is no guarantee on how it will go. While this meeting was far from over, we covered what I felt was the answer to her original question: What makes up the purchase price and cost of the mobile home park?

As I laid out to Marie during this conversation, there is more to the cost of a mobile home park than just the purchase price being advertised. In this case, there were hundreds of thousands of dollars being added on to the purchase price just to acquire it. Had we done no repairs, the $1.9 million park easily reached a total cost of almost $2,150,000.

There are a lot of factors and considerations that a general partner must make long before capital is raised. Oftentimes, more deals do not make it to capital raising than the ones that do. The amount of work that goes into acquiring a deal, structuring a syndication, raising capital, and closing on the park is tremendous. It is a balancing act of problems and tasks each day. Like anything in life, it requires focus, education, and hard work. There is also a heavy financial burden on the general partner to get the deal just to the capital raising stage. An operator must have a good financial base to pay for all the upfront costs out of pocket. It will take months before they can be reimbursed for their expenses, and if the deal does not close, they will solely bear the burden of that loss of capital.

As a limited partner, it is important to know the true costs of an investment and how the money you are investing is going to be applied. Which costs are being reimbursed to the general partner, and which will be paid out at closing? Although no offering memorandum, pitch deck, or deal presentation can cover every question or situation, having a general partner who is upfront and transparent with the numbers and open to being questioned is an essential part of a successful mobile home park purchase.

If you want to discuss this article further or just Passive Investing in General, use this link to schedule a video chat with me and Let’s Talk!

Lock N’ Load

-The MHP Operator