Due Diligence Cheat Codes

The buy puts money in your back pocket, but due diligence lets you keep your pants.

Ok, that was not our best work and perhaps a bit cheesy, but it gets the point across: due diligence covers your ass.

Unfortunately, most mobile home park investors hate conducting due diligence.

Think about it. You’ve just scoured the earth looking for a deal that actually pencils and you somehow convince the seller to part with it. Then you go back and forth for weeks negotiating deal terms, talking to your lawyer, marking up redlined contracts, all while saving the deal 2 or 3 times when the seller goes dark on you.

But despite the universe of moving parts conspiring against you, the seller finally signs the contract at a fair - or dare I say - great price. You’re a hero.

And now, after you’ve slayed this dragon, after you fought off the sea of competing private equity buyers, you, the great Deal King must somehow morph into a lowly fact checker.

No seriously, the clock started the second that contract was signed. You better start digging in; tick tock, tick tock. Get excited because it’s time to start reviewing leases, cross checking expenses, and watching hours of sewer camera footage (btw, this will not impress your spouse or kids). Lucky you!

Seriously, who has time for this small ball? Is this what we got into real estate for? You expected steak dinners and high finance but you’re now two hours into trying to figure which tenant paid lot rent with this blurry $300 money order.

This is not what we signed up for.

You really should be out finding more mobile home park investments, pitching wealthy investors to fund your deal or convincing a bank to lend you millions at favorable terms.

Nope, back to checklists you pleb!

Yes, we know, we’re being dramatic. But it’s admittedly kind of a bummer. You can obviously hire a team of people to handle diligence, but that can be hard for control freaks that know one major oversight could torch a ton of cash.

So if you don’t get your kicks from checking boxes and organizing paperwork, here are some due diligence cheat codes that might make the process a bit less painful and give you more confidence to bring in outside help.

Caveat - these are 80/20 (Pareto Principal) diligence tips for owners or investors that typically have higher level tasks on their plate. These are useful to avoid the some of the larger land mines when investing in mobile home parks.

Due Diligence Cheat Codes

We’ve made plenty of due diligence mistakes. Rest assure, you probably can’t and won’t catch everything, but this will help:

Utilities

• Location of pipes (get a map if possible) - working on pipe leaks under homes is brutal, often requires crazy hand digging ($$$) for repairs. Budget accordingly if that’s the case.

• Utilities - analyze park infrastructure far more than industry experts might suggest - hire a local contractor with history working on the park and not the seller’s recommended plumber / brother-in-law. (P.S. there are no cheat codes for private utilities, hire experts!).

• Pipes - ideally PVC (schedule 40 or 80) for sewer - cast iron sewer not ideal, but can work. Avoid orangeburg at all costs. Water pipes - get two contractors to look at their condition, it’s critical you don’t get a failing system unless you budget for full replacement.

• Back to the sewer camera - frankly, if the camera can get through the pipes in a few hours, you’re probably in decent shape as that means there are no large blockages or bellies. Pay up to get the entire park’s main lines reviewed (older parks are often hodge podges of various line materials after decades of random section replacements).

• Water bills - Above all you want consistency over multiple years. If there are crazy spikes, you might have to replaces the lines. The seller will tell you there no big deal, you just repair as needed. That might be true, but pipes with consistent leaks are far more likely to experience complete failure at some point (a several hundred thousand dollar repair for an average park). Also check rates vs. how the park is billing for usage (often a small profit center hiding in plain sight).

Financials

• P&L - take with a grain (or whole shaker) of salt. Cross check damn near everything vs. bank statements. Note any large expenses that don’t tie (bonus points: you can hire a CPA or bookkeeper to recreate financials from bank statements).

• Revenue - (from check scanners, check deposits, AND not internal bank transfers). If you only get one thing right in diligence, make it the revenue. Collections - it’s good to see the actual checks money orders for one month if possible. When do tenants typically pay? Are they consistently late? Is there a large group of retirees that pays on the 15th each month after getting their social security checks? If so, plan accordingly.

• Capital expenses are TRICKY (owners can hide recurring expenses in cap ex, claiming the most basic, ongoing maintenance expenses as one time capital expenses). We’ve seen parks claim 25% expense ratios with large net operating incomes yet they are bleeding cash when you cross check vs. bank statements. Two quick ways to spot this (if they keep an accurate running balance sheet or more likely via tax returns) is 1) by tracking the owners capital account to see if cash contributions increase over time or 2) seeing if the infrastructure line items keep growing in value due to all the leak repairs (they should be dropping due to depreciation). This is sort of a gray area so don’t assume malicious intent, just get the info.

• Is there a separate set of books for park owned homes??? This is way more common than you’d think. Once again sometimes this is innocent, but sometimes the seller is being shady.

Onsite

• Drive the park (a lot) - middle of weekday and weekend night (look for homes that are clearly unoccupied (no foot-tracks in snow, no cars ever, no lights on at night).

• Manager interview - buy them coffee or a beer (away from the owner preferably) and just get out of the way (let them TALK). We have yet to meet the property manager that doesn’t have the gift of gab. They will almost certainly overshare - take notes. Many are, let’s just say, a bit dramatic so don’t panic if they tell you the park floods every time it rains (this is manager speak for a 3 inch deep puddle in front of their house), but either way you’ll learn a lot.

• Tenant interviews - some of these might be painful, but important if the owner won't give you alone time with the property manager (make sure it’s a random selection of tenants). Not a great idea to spook the tenants about a pending ownership change, therefore tell tenants that you’re interested in moving a couple new homes into the park (true) and just want to know what it’s like to live there.

• Check rent roll vs. reality - Look at lots/homes vacant on the rent roll & confirm they are indeed vacant (easiest way for managers to steal money).

3rd Party Reports

• Survey - (hire good lawyer if you’re not a real estate expert) - on larger parks we always recommend an ALTA survey (which is a couple levels up from a boundary survey, which is only helpful for title and encroachment issues). Your lender will probably want a gold plated survey, push back if that doubles the price.

• Phase 1 - if it contains as sentence that says “no recognized Environmental Concerns….” all good. If not, very bad.

• Title report - don’t even try. Lawyer up.

Location

• Floodplain. Tricky stuff, not to be trifled with. Tread carefully if you don’t know what you’re doing here. If partial, get a discount. If in the 500 year floodplain, you should look for the average depth - might only be 1 foot (homes are often 3+ feet above ground) - if you must do a 100 year floodplain deal (yikes, I’m scared for you), get seller financing. Please don’t do a recourse loan deal in a flood plain.

• Park Location - Always look at the ingress/egress of the park, is it convenient to spot? Is there initial curb appeal? Or is it hard to find and sandwiched in between a graveyard, the city dump, the city sewer plant and several industrial buildings. If so, it almost doesn’t matter how good the market is, those tenants are going to be problematic.

Park Owned Homes

• Walk through ALL vacant homes unless you plan on demoing.

• Titles - make sure owners have titles IN THE CORRECT ENTITY. If not, push that work onto the seller or don’t pay for those homes.

• State’s Title Laws - what’s the abandoned home process? Do you need court ordered titles? Can you hire a title services company? How long does it take to get home titles?

Park Property

• Does the park own trucks, lawn mowers, snow plow etc? Condition of these items? Are they actually operable or are is the seller going to stiff you with the junk removal bill.

• Are there storage/office buildings? Sometimes that large maintenance building’s roof is rotting and needs a $100K replacement (ask us how we know this…..). If you have an institutional lender, they will required a property condition report that should flag some issues - get a your contractor to take a second look.

• Permit - if the park is located in a permit state, make sure you see this thing with your own two eyeballs. No permit = no park.

Diligence Easy Mode

If we could only perform one diligence task, it would be a 2-4 hour meeting with the current property manager. Frankly, if an owner or investor looking to optimize time they could probably outsource most of the fact checking details and take those notes + questions to meet with the manager and walk the site.

Regardless, rest assure that no mobile home park is perfect; there’s always something found during due diligence that hurts the numbers.

The key is to have the stones to either walk away from a deal when there are big problems OR enough knowledge to know which surprises are worth overlooking.

Happy Trails,

MHP Weekly