Mobile home park investing typically offers exciting opportunities, but it also brings unique challenges. One often overlooked aspect of due diligence is confirming who owns the mobile homes in a trailer park. Ignoring this step can lead to costly mistakes, especially if a significant portion of the homes is owned by third parties. Let’s dive into why this step matters and explore the risks involved when you skip this crucial part of mobile home park due diligence.

Mobile Home Ownership: A Critical Step in Mobile Home Park Due Diligence

In mobile home park investing, many investors focus on obvious items like financials, lease agreements, and the physical condition of the trailer park. However, one vital step that often gets overlooked is confirming the ownership of the mobile homes themselves. Who actually owns the trailers sitting on your land? The answer might surprise you—and it could make or break your investment.

Third-party ownership of mobile homes can pose serious risks. For example, a “Lonnie Dealer”—someone who buys and rents out mobile homes—might own several homes within the trailer park. This situation might seem harmless at first, but it can become a huge problem.

Horror Story: How One Deal Almost Fell Apart

We almost lost a deal on the one-yard line because we discovered that a ‘Lonnie Dealer’ owned 12 of the 50 trailers in the mobile home park. That’s 24% of the total homes! If this dealer became unhappy with a rent increase, they could pull out all of their homes, devastating the project’s revenue. Suddenly, you’re left with a lot full of vacant lots and a massive loss of income.

This situation highlights the importance of verifying who owns the homes in the mobile home park. If a large percentage of homes are owned by third parties, you can lose control. The fate of the trailer park could hinge on a single decision made by an outside party.

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How to Confirm Trailer Ownership

The good news is that confirming who owns the homes isn’t difficult. You just need to know where to look.

1. Check the Rent Roll: This document should list who is paying rent on each lot. Look for any signs that a third party, such as a ‘Lonnie Dealer’, owns multiple homes.
2. Contact the Tax Assessor’s Office: Mobile homes are often taxed separately from the land. The tax assessor can tell you who owns each home. Cross-reference this with your rent roll to get a complete picture.

By taking these simple steps, you can likely avoid a situation where a third-party owner has too much influence over your investment.

The Risks of Subleasing in Mobile Home Parks

Another common pitfall in mobile home park investing is subleasing. Many investors assume subleasing won’t cause problems, but that’s not always the case. In fact, subleased homes can lead to significant issues.

We have acquired mobile home parks where several homes were subleased, and the results were often disastrous. Subleased homes tend to be poorly maintained because renters don’t usually have a personal investment in the property. Over time, these homes can become damaged or even trashed, causing expensive repairs for the owner. Worse, sublease agreements often fall through the cracks during due diligence, leading to unwelcome surprises later.

We try to avoid these risks by not allowing subleasing in our lease agreements. This policy helps keep all tenants accountable for the condition of their homes and generally reduces the likelihood of costly repairs down the road.

Unpaid Utility Bills: A Hidden Threat

Another often overlooked risk in mobile home park investing involves unpaid utility bills. Many new owners don’t realize they could become responsible for a tenant’s unpaid utilities. In some cities, if a tenant skips town without paying their bills, the utility company may refuse to turn on the service for the next tenant until the outstanding balance is paid. In some cases, the landowner becomes responsible for settling these debts.

Imagine the financial hit if you suddenly had to pay off months’ worth of overdue utility bills before you could rent out a lot. This situation can severely impact your cash flow, especially if it happens across multiple lots at the same time.

How to Avoid These Common Pitfalls

Due diligence is critical in mobile home park investing, and these horror stories show why. Here are a few tips to help you avoid these common pitfalls:

• Verify Ownership: Always confirm who owns the homes in the trailer park. Don’t rely on assumptions. Check the rent roll and the tax assessor’s office to ensure you have full control over the mobile homes.
• Prohibit Subleasing: Avoid subleasing arrangements by including a strict no-sublease clause in your lease agreements. This step could help maintain the quality of the homes and protect your investment.
• Check Utility Agreements: Investigate local laws and utility company policies regarding unpaid bills. Understand who becomes responsible if a tenant skips out. Build this potential cost into your due diligence process so you aren’t caught off guard later.

Partner with Experienced Mobile Home Park Operators

Navigating these issues requires experience. Partnering with someone who has a proven track record in mobile home park investing can help you avoid common pitfalls and manage unexpected challenges. An experienced operator typically understands how to perform thorough due diligence, handle trailer ownership verification, and mitigate risks like subleasing and unpaid utilities. By working with a trusted partner, you can potentially reduce the risks associated with mobile home park ownership.

Conclusion: Due Diligence Is Essential in Mobile Home Park Investing

Mobile home park investing can offer potentially great returns, generally only if you do your homework. Skipping critical steps like confirming trailer ownership, allowing subleasing, or ignoring unpaid utility liabilities can turn a great investment into a nightmare.

Take the time to perform thorough due diligence on every deal. Verify who owns the trailers, eliminate subleasing risks, and understand the utility billing rules in your market. Most importantly, work with experienced operators who know how to navigate these potential pitfalls.

By doing so, you can likely protect your investment and set yourself up for long-term potential success with mobile home park investing.

Book a 1-on-1 consultation with Andrew Keel to discuss:

• A mobile home park deal review
• Due diligence questions
• How to raise capital from investors
• Mistakes to avoid, and more!

Disclaimer:

The information provided is for informational purposes only and is not investment advice or a guarantee of any kind. We do not guarantee profitability. Make investment decisions based on your own research and consult registered financial and legal professionals. We are not registered financial or legal professionals and do not provide personalized investment recommendations.