We could NEVER afford to buy this mobilehome park!” These words came from Bill, a 65 year-old gentleman who sat across from me at the dining room table in his mobilehome. Around the table sat four of Bill’s neighbors in the park, a 50-space community located in Northern California. They nodded in agreement with Bill. One said, “Dave, you don’t understand. This is not a rich park. We have some working people here, but most are senior citizens living on small, fixed incomes. Even if we wanted to buy the park, how could we afford it?”
Bill (the President of the park’s homeowner association) had asked me to meet with his group. Word had come to him that the park owner planned to sell the park, and would consider selling it to the homeowners. However, the homeowners would have to pay his price, and complete the purchase in a short time frame. The price mentioned by the park owner was well in excess of $1 Million. Bill knew that I lived in a park that had been bought by its homeowners in 2005. He knew I had been involved in the legal aspects of our park’s deal. He was curious about how we had accomplished our goal of resident park ownership. The idea of owning the park appealed to Bill and his group, but they had many questions. Was their owner’s asking price fair? What about the condition of the park? Where could they find money to buy the park, and could they really afford to buy it?
The group around that table didn’t realize it that afternoon, but they already had two major pieces of the “park purchase puzzle” in place. They had:
An owner willing to sell the park at a fair price, and,
A few homeowners who wanted to take a serious look at the park purchase idea.
What they did not have yet was:
An experienced consultant who could help them confirm the park’s value, find financing to buy the park, and help them address the many aspects of a complex real estate transaction.
A specific plan on how to approach the project.
These things would come later. For now, Bill and his neighbors needed some basic information about “co-op” park purchases. (By “co-op,” I mean a purchase of a mobilehome park by an association made up of the park’s homeowners. That is, the homeowners’ association would own the park, and each household could each own a share of the association. In today’s financial markets, a co-op purchase is the only kind that makes sense for mobilehome owners). Bill, his neighbors and I discussed the following points:
– Any purchase where the homeowners will own the park (rather than some “outside” nonprofit corporation) will require some input of equity money from the homeowners. A lender will want some equity to be put in by the people who will own the park. Usually, the homeowners put equity into the deal by each purchasing a share in their homeowner association.
– If the association buys the park, it is likely that members’ monthly payments will be more than when they simply rented a space. The association’s goal is to make this increase affordable. Once homeowners understand the benefits of park ownership, and if they can afford the proposed monthly increase, they tend to join the association
– Every homeowner in the park does not have to buy-in to the association for the resident park purchase to succeed. Usually, 60 to 70 percent participation is enough. For Bill’s 50-space park, this meant between 30 and 35 households needed to participate to allow the association to buy the park.
-“Government” lenders (e.g., state or county government agencies) may offer attractive low interest loans. But government loans come with strings attached, such as the requirement that the park meet certain low-income standards. A group needs to carefully evaluate whether they want to be bound by these strings, or not. Also, getting government money can take many months, and a park seller may not be willing to wait that long for his money.
– Local banks often hesitate to make mortgage loans to mobilehome park associations. They are not eager to lend to associations with little business history or money in the bank.
– If you use commercial financing for your association’s first mortgage, you will need a lender willing to make a “high leverage” loan. Typically, that loan that will cover about 80% of the park’s fair value plus the costs of sale. A high leverage loan allows the park’s homeowners to come up with less out of their own pockets to make the deal work.
– You must have a plan for “share-financing.” It’s likely that some homeowners in the park will not be able to pay “cash” for their share in the homeowners’ association. The association needs a way to let those homeowners participate by buying their share with a small down payment.
The association leaders must perform due diligence regarding the park purchase. That means thoroughly analyzing the “numbers” presented by every consultant who offers to help you buy the park. It means not signing contracts with any consultant until the deal has been completely explained and understood. Anything less, and the association leaders have done a disservice to themselves and every homeowner in the park. (For more on “due diligence,” please read my article in the May/June 2007 Voice).
It was two years ago that I sat with Bill and his neighbors around that table. Shortly after our meeting, they found a consultant, did their “due diligence,” and came up with a specific plan to buy their park. They completed the purchase in 2006. Today, they have stabilized their rents for the long-term, no longer worry about the possible loss of local rent control, and have seen their home values increase substantially. Through their association, they own the land where their homes are sited. By the numbers, their park purchase looked like this:
– Share price (“buy-in”) = $12,000.
– Number of Shares offered for sale = 50 (one per household).
– Buy-In Terms: Pay $12,000 cash for a share, or finance 95% of the share purchase by putting $600 down. (About ½ of the households who joined financed the purchase of their shares).
– Number of households who “bought-in” at time of park purchase = 45. I.e., nine out of ten households bought in.
– Average monthly rent paid per household as a “space rent” park before resident ownership of the park = $260/mo.
– Monthly fee for members after park purchase = $390/mo. This covers park operating expenses, payment on the association’s mortgage on the park, and payment into the association reserve account.
– Monthly rent for those households that did not participate = $260/mo (rent control stayed in effect for non-participants). The “renters” now have the association as their landlord.
– Mortgage Terms: The association got an 80% loan based on the appraised value of the park. As part of their first mortgage loan, they also borrowed some money for park “fix-up” and to establish a reserve account. The association has a fixed rate (not adjustable) mortgage at 6.1%. The mortgage loan is to be refinanced in 10 years. All borrowed money came from one commercial lender (no government loans used). The park has no low-income requirements or restriction on home resale values.
David Loop is a real estate attorney and past homeowners’ association president at resident-owned Aptos Knoll Park, near Santa Cruz. You can ask him questions by sending an e-mail to email@example.com, or calling 831-688-1293.