Mobile Home Park Due Diligence by Dave Reynolds

When you put a mobile home park under contract you will definitely want to have a stipulation in the contract that will allow you confirm what the seller has said so far as well as evaluate the overall feasibility of the purchase. Due Diligence will look at the physical, economic, demographic and market feasibility of the project. This time period is usually between 30 and 60 days. In conducting your due diligence you are looking to identify anything that poses a potential issue and that you are able to change or fix. These usually deal with the cleanliness of the park (junk & trash piled up), mismanagement, lack of rule enforcement, collections, expenses that can be reduced. But more importantly you are looking for those problems that you may not be able to fix or that will be very expensive to fix. These types of issues usually deal with the size of the lots, reputation, problems in local market, flood plains, drainage problems, bad configuration of lots, water, sewer, electric, and gas line problems. In conducting your due diligence you may call on experts in surveying, accounting, marketing, financing, plumbing, electrical, and legal. Ask the Seller to provide you with the following (if applicable): 1. City, County and State Permits and Licenses 2. Sewer Plant Records and Readings 3. Water Well Tests and Compliance Records 4. Existing Surveys or Environmental Reports 5. Water and other Utility Meter Reading Records and Formulas 6. Property tax bills for the last 2-3 years 7. Copy of current insurance policy and binder showing premiums and coverages 8. Current staffing list including position, wages, job descriptions 9. Any drawings and maps of the park and infrastructure and size of lots 10. Any Contracts that will be transferred to buyer at closing(laundry, trash, phone) 11. Signed Rules and Leases for each resident 12. Bank Statements 13. 2-3 years Tax Returns 14. 2-3 years Profit and Loss 15. Certificates of Occupancy 16. List of Capital Expenditures for the last 3 years 17. Listing of any current park infrastructure problems(water, sewer, gas, electric) 18. Rent Roll with specific homesite number, name of resident, move-in date, monthly rent, current balance, additional charges, number of occupants, and a brief history of the resident(good resident / bad resident, special circumstances, etc) 19. Names and phone numbers of all of all contractors used in the last few years - plumbers, electricians, propane, gas, roto rooters As you are receiving this information from the Seller you will want to evaluate it with the other information you receive from outside sources. 52 basic areas to cover in the Due Diligence period not necessarily in any order: 1. Park Location Issues: Is it close enough to shopping, employment, schools, transportation. Will potential residents be able to find the park? 2. Flood Plain: Is the park located in a flood plain? If so, when was the last time it has flooded? If the park does flood, are the homes high enough to remain undamaged? Do the homeowners have flood insurance? 3. In most cases, buying a park in a 100 year or 500 year flood zone will not come back to bite you. However, you should definitely understand the risks involved. Most of the time your renters will just have to carry flood insurance and your lender will require the same for your buildings and utility connections. 4. Noise Problems: Loud outside noise can often be a deterrent for living in a certain mobile home park. Being located close to highways or busy streets and also nearby trains can be very annoying to potential residents. 5. Find out if the park is required to be licensed and if so that it has the required license. You will want to check that the park is operating in compliance with the license. If a park has 50 units but is licensed for only 25, you may have potential problems. The license may be issued by the State, County, or Local authorities. Often it is issued with the State Board of Health. Some cities have laws that state that if a certain percentage of the homes in a park that has "grandfathered" zoning are destroyed, then those lots will not be allowed to be rented again. This can happen from fire, tornado, hurricane, etc. Check the local codes. 6. Review any park inspection reports conducted by the State Board of Health or other City/County inspectors. In some states, especially those where licenses are required, the state does an annual inspection and produces a report with notices of any violations. It is good to see these violations and be sure that they have been corrected. 7. If you are considering hiring the current management you may want to have friends or associates make a few calls to the property and see how the management handles the calls. Also, if you visit the manager's home and it is not kept up good and they have a set of rules for themselves it may be an indication that you should look for other management. 8. After you have the park under contract and usually after you have the owner's permission it is definitely a good idea to interview some of the current park residents. They are usually full of information when it comes to finding out how the park is actually operating. You will often hear about water problems, sewer problems, and any other common problems by talking to the residents. 9. Another good source of information would be the local mobile home dealers. They usually know about most of the parks and can give you information on the parks reputation, whether they have in the past and will in the future refer the park to potential residents, etc. You might also find out if they have trade-ins or other reasonably priced homes for sale. 10. If possible, you will want to visit the park at various times of the day, morning, noon, after dark as you will be able to see the park as it is. It is also advisable to see the park during the week and on the weekends. This will give you a better indication of parking, occupancy, lighting, as well as noise level. 11. The local Chamber of Commerce is also a wealth of information. They can give you information on population trends, new and current employers, potential plant shutdowns, as well as the general market conditions of an area. 12. Local Real Estate Brokers can also provide a wealth of information on the area and market and real estate outlooks. 13. Good school districts are often a great place to own parks. Many times these districts are in wealthy areas of the city and less affluent people are often looking for affordable housing in these areas to allow their children to be in these good school districts. 14. Contact the Property Tax Office: to check tax rates and whether taxes are current. Learn what their assessment procedures are so that you can estimate how much you will be paying in taxes if you purchase the park. 15. Verify the rent rolls as well as copies of receipts to verify that the amount actually collected is being reflected correctly. Often times, park owners forget to tell you that they give some people discounts (seniors, friends, relatives, etc). 16. For insurance purposes make sure to verify the pet restrictions as well as the enforcement of such. Most insurance carriers do not allow dangerous breeds of dogs or even dogs over 20 - 30 pounds. 17. Water Lines: what are they made of? Are there signs of water leaks? Is the water pressure acceptable? Many times you will have some areas of the park where the water pressure is much lower than the rest. You can review bills from the utility companies from the same month over a couple years to locate any major problems/leaks. 18. Sewer Lines: typically you will have problems with older sewer lines: clay pipe and thin walled plastic pipes. Clay pipes will allow large tree roots to start growing inside which will start causing backups. In addition clay & thin walled sewer pipes will also tend to crumble and then plug up. You may be able to have a camera check out the pipes as well as have them professionally blown out with high speed water jets as periodic maintenance. 19. With electric service, you will want to check whether the electric is above ground or below ground. If above, you will generally be responsible for the main electric poles so take a look at the electric poles to see if they are rotting near ground level. These can be quite expensive to replace. Another potential electric issue is that most of the homes now require 100 to 200 amp service. Many of the older parks have electric service with 30-50 amps service. This will usually require an upgrade which will usually cost $500-$800 in parts and labor to upgrade. 20. Gas service. If you are responsible for the gas meters and lines then you may want to have the system pressure tested as a small gas leak can cause your service to be shut down until it is located and repaired. It is also a good idea to have this done on a routine basis to avoid potential problems. 21. Fire Hydrants located nearby. A question your insurance company is sure to ask. 22. Trees: Many times you will see a park that is full of large beautiful trees and it may look real nice. However, these trees will definitely cost you down the road. You need to keep them trimmed, remove old and dead trees, cleanup the leaves every year, as well as auger sewer lines that become filled with tree roots. Falling branches are often one of the most likely insurance claims. 23. Roads: are the roads in good repair, do they need to be resurfaced, are they wide enough, are there speed bumps, etc? Roads that are not maintained are often one of the most widespread complaints you will get from your residents. 24. Drainage Problems: It is advisable to know how a mobile home park drains after heavy or sustained rains. Even if the park is not in a flood zone, it can have a horrible problem with standing water and puddles. Getting rid of the excess water can be costly and difficult. 25. Sewer Plants: when a mobile home park has an actual sewer system, lagoon, or is on septics this is another area in which you should definitely find out as much as possible. You want to know how the system operates, whether it is meeting the EPA guidelines, what it costs to run, what upgrades have been made, whether it is running at full capacity, do you need to have a licensed operator, how many hookups it is licensed for, etc? 26. Lift Stations: are they adequate, do they have warning lights, are there backup pumps? 27. Walk property during the day and at night. You will uncover many problems such as smells, dog barking, parties, hidden trash & junk, water leaks, sewage puddles, old electrical boxes 28. Water Wells: what type of system, how deep are the wells, water pressure, any prior violations or problems, backup systems, what does it cost to operate, if the owner is the Licensed operator are there operators in the area that are available and reasonable to operate, can you send your manager to classes to obtain the operators permit/license. How many spaces is it licensed for? 29. Who pays what? Utilities, Cable, Mowing, etc: find all those hidden expenses that the owner takes care of cheaply (does he haul the trash to the dump?). If the trash is not being hauled off, what are the residents doing with it? 30. History of Rent Increases: have the rents been increased on a regular basis? 31. Count the lots - some may have been combined and many parks have weird numbering schemes. 32. Late Fees: take a look at the bank deposits and compare with the rent roll. When are the rents coming in, are late fees being charged? 33. Security Deposits: get a certified list of Security Deposits from the owner. If later on, someone claims to have a deposit that is not on that list you have it in writing from the owner. 34. Check the leases: is there any strange language in the leases? Are they month to month. Are there long term leases that will make it difficult to raise rents or submeter water?. 35. Hazardous Materials: don't even consider buying a park without having a Phase 1 environmental study done. If there are any underground storage tanks, above ground storage tanks, chemical drums, buried waste, lagoons, stained soil, gas pumps, auto repair shops, electrical transformers, asbestos in building, etc., you may be liable to the US Gov't for millions in cleanup costs. 36. When looking at a park make sure you check into anything that does not seem right. Are there easements that don't make sense, are there oil wells on the property, etc. 37. It is also advisable to obtain a current or recent survey of the park. You want to be sure you are buying what you think you are buying. Are some of your mobile homes over the property line. Are there fences or sheds over the property lines. With a new owner, the adjoining land owners may use this time to enforce some of these issues. Check the legal description with the survey and with your contract and warranty deed. 38. Seller says the property can be expanded. Make sure the current zoning will allow the proposed expansion. Also make sure that it is feasible: Where can you tap into the water, sewer, and other utilities? Does the current water wells and sewer plant have the capability to service additional homes. What are the impact fees. What are the likely costs to expand. 39. Lot Sizes: one of the biggest issues with older mobile home parks is that they were built for 10-14' x 50-60' homes. As most of the newer homes are 16' x 80' and up, this can become a real issue when replacing homes or filling vacant lots. In addition, some cities/counties are requiring homes to be a certain age. Thus, moving an older 12' x 50' home into your park may not be an option.
About the Author

About the Author:

Dave Reynolds is regarded as one of the leading Manufactured Housing Industry experts. He has purchased over 50 mobile home communities, 100's of mobile homes, and through his website, www.mobilehomeparkstore.com, he has helped thousands of investors buy and sell mobile home parks. Mr. Reynolds has also authored and co-authored some very informative books on investing in Mobile Home and RV parks and is co-founder of MHPCo