Interview with Scott MacNeil, CEO of Performance Equity Partners (PEP Lending) 

SHOW NOTES

Welcome back to the Passive Mobile Home Park Investing Podcast, hosted by Andrew Keel. On this episode of the Passive Mobile Home Park Investing Podcast, Andrew is joined by Scott MacNeil, Chairman and Chief Executive Officer of Performance Equity Partners, Inc. (PEP Lending), a chattel lender serving the manufactured housing industry across 16 different states. 

In this episode, Andrew and Scott discuss Performance Equity Partners (PEP) in detail, from default rates and recourse guarantees, to the trends in the manufactured housing chattel lending industry. 

Scott MacNeil and his team at Performance Equity Partners are experts in the chattel lending industry and they have processed over $160 million in MH chattel lending contracts. In addition, Scott has a keen interest and a wealth of knowledge in the passive mobile home park investing arena, which he shares with us today.

***Andrew Keel and Keel Team Real Estate Investments (Keel Team, LLC) do not endorse any interviewee. This interview is for informational purposes only and should not be depended upon for investment purposes. ***

Andrew Keel is the owner of Keel Team, LLC, a Top 100 Owner of Manufactured Housing Communities with over 2,500 lots under management. His team currently manages over 40 manufactured housing communities across more than 10 states. His expertise is in turning around under-managed manufactured housing communities by utilizing proven systems to maximize the occupancy while reducing operating costs. He specializes in bringing in homes to fill vacant lots, implementing utility bill back programs, and improving overall management and operating efficiencies, all of which significantly boost the asset value and net operating income of the communities. Check out KeelTeam.com to learn more. 

Andrew has been featured on some of the Top Podcasts in the manufactured housing space, click here to listen to his most recent interviews:  https://www.keelteam.com/podcast-links. In order to successfully implement his management strategy, Andrew’s team usually moves on location during the first several months of ownership. Find out more about Andrew’s story at AndrewKeel.com.

Are you getting value out of this show? If so, please head over to iTunes and leave the show a quick five-star review. I have a goal of hitting over 500 total 5-star reviews, and it would mean the absolute world to me if you could help contribute to that. Thanks ahead of time for making my day with your five-star review of the show.

Would you like to see value-add mobile home park projects in progress? If so, follow us on Instagram: @passivemhpinvesting for photos and awesome videos from our recent mobile home park acquisitions.

Talking Points:

00:21 – Welcome to the Passive Mobile Home Park Investing Podcast

01:38 – Scott MacNeil’s journey into manufactured housing chattel lending

03:26 – How chattel lending has changed since 2007

06:00 – The approval rate of Performance Equity Partners (PEP lending)

09:50 – Why Performance Equity Partners might be a good choice for you

11:50 – Current rates and values on mobile homes

15:00 – Default rates and recourse guarantees

17:53 – The Performance Equity Partners process for qualifying new applicants

22:43 – Investment strategies: What’s your return?

24:00 – The mobile home park industry in the state of Illinois

26:00 – Reaching out to Scott MacNeil or  Performance Equity Partners (PEP Lending)

26:25 – Conclusion

SUBSCRIBE TO THE PASSIVE MOBILE HOME PARK INVESTING PODCAST YOUTUBE CHANNEL: https://www.youtube.com/channel/UCy9uI3KGQmFgABsr9lUtRTQ

Links & Mentions from This Episode:

PEP Lending website: https://peplending.com/ 

Scott MacNeil’s phone: 708-253-6010

Keel Team’s official website: https://www.keelteam.com/   

Andrew Keel’s official website: https://www.andrewkeel.com/   

Andrew Keel LinkedIn: https://www.linkedin.com/in/andrewkeel  

Andrew Keel Facebook page: https://www.facebook.com/PassiveMHPinvestingPodcast 

Andrew Keel Instagram page: https://www.instagram.com/passivemhpinvesting/ 

Twitter: @MHPinvestors

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TRANSCRIPT

Welcome to the Passive Mobile Home Park Investing podcast. With your host, Andrew Keel. This is the podcast where you can get the education you need to invest 100% passively in a highly profitable niche of mobile home parks.

Andrew: Welcome to the Passive Mobile Home Park Investing Podcast. This is your host, Andrew Keel. Today, we have an amazing guest in Mr. Scott MacNeil, CEO of PEP Lending.

Before we dive in, I want to ask you a real quick favor. Would you mind taking an extra 30 seconds to head over to iTunes and rate this podcast? This helps us get more listeners, and it literally means the world to me. I read every single review. Thanks for making my day with that five-star review of the show. All right, let’s dive in.

Scott MacNeil is chairman and CEO of Performance Equity Partners Inc., a chattel lender serving the manufactured housing industry across 16 different states. In 2007, a group of bank officers wanted to continue the MH Chattel program when it was announced that the bank was being sold to a larger institution that no longer wanted it. They formed a mobile home sales finance corporation in June of 2007 that purchased the existing manufactured housing loan portfolios. To date, over 160 million dollars in contracts have been processed by the PEP Lending team. Scott, welcome to the show.

Scott: Thank you, Andrew. Pleasure to be here.

Andrew: Yeah. Would you mind starting out by just sharing your story and how in the world you got into manufactured housing, chattel lending?

Scott: Yeah, absolutely. Out of law school, I applied at a local bank in my hometown that was hiring. They hired me, and they were busy in the manufactured housing industry at that time and also commercial lending. I joined the commercial team. Also, I had some involvement with manufactured housing as well. The bank was busy buying paper from some other originators out there in the industry.

Everything was going great at the bank, until the majority owner received an absolutely fabulous offer to sell the bank. That was in 2007, as you mentioned. Actually, it’s the highest multiple ever paid for a bank in the state of Illinois in an all cash deal. He couldn’t say no. We sold out to citizens, which is owned by Royal Bank of Scotland.

As you pointed out, the chattel lending and the consumer lending division they have was of no interest to the bank acquiring us. Five of my coworkers formed Performance Equity Partners, and they brought over all the employees that were going to be out of jobs anyway. It was a good thing, and they’ve been running it separately ever since. I went off and continued commercial lending and then rejoined PEP about four years ago.

Andrew: Wow. That’s fantastic. What changes have gone on at PEP since 2007? With what 21st mortgage has done with the chattel lending space, I’m curious how things have changed since 2007 when PEP got started.

Scott: Sure. When we originally started, we were in three states right around in the great lakes region. We’ve since expanded to over 16 states. We continue to expand. We go where the business takes us. If we’re working with a community owner, and things are going great from their perspective and from ours, and they say, hey, we just bought a new community in this state, we’d love to use the program. We’ll research the laws and get licensed up as quickly as we can so we can follow the business wherever it takes us.

Some of the other things we’ve improved over time is we’ve really loosened up the criteria that we use to underwrite files. We have what I consider the lowest down payment requirement in the industry, which is 3% minimum down payment. That originally started at about 10% and was dropped over time to where it is currently. That’s one of the big added features.

We don’t have limits on the age of units. We’ll do new units, used units. We’ll even do pre HUD units, which we don’t see those too often anymore. We used to see a decent number of those, but I think community owners have scrapped those in favor of newer product. We try to make the program evolve, get better, and meet the needs of the community owners as time goes by.

Andrew: That’s great. In the beginning stages, did you require the community owners to sign on the loans as well? Has that always been a feature?

Scott: That has always been a feature. Our program is a recourse program. The interesting thing about chattel lending is there’s not a whole lot of companies out there. I think a lot of your listeners will know the 800-pound gorillas that are out there, and then there’s a number of smaller jobs similar to ours that work more in a regional manner. But everybody does it a little bit differently.

Even if it’s a recourse program, there seems to be a wide variety of how the recourse works, et cetera. I do still tout us as having the most liberal terms in terms of qualifying individual applicants and underwriting people on an individual basis.

Andrew: That’s interesting. What would you say your approval rate is for applicants? What percent of loan applicants get approved?

Scott: We approve about 50% of all the applications that we see. Other people aren’t going to qualify for a variety of reasons, but a big reason would be the debt to income ratio is just simply too high. We max out at 43% debt to income ratio. A lot of people just don’t meet that, because they have too much debt or not enough income. We also see issues, where people have just too much other consumer debt or simply not enough credit, although we have a variety of tools, where we can overcome the lack of credit in certain situations.

Andrew: Okay. Very cool. What trends are you seeing right now in the quality of borrowers or applicants today versus 18 months ago?

Scott: Covid was an interesting time, obviously, for a lot of reasons. A lot of people took time off from the workforce, and then they jumped back in. Job gaps was a hurdle that we had to overcome. I think we were able to do that in the majority of situations. We really didn’t penalize people if they weren’t working for a period of time due to the pandemic.

That was a big change that we saw, although oddly, there was a lot of home buying activity during that period. We saw people that had a lot of cash in their pockets, and we’re looking at the opportunity to move into home ownership. It was 2020-2021, later in those years, we were extremely busy with people buying homes during that time.

Andrew: That’s fantastic. I guess just at a macro level, what don’t we know? As investors in mobile home communities, operators, what are some of the top things that we don’t know about MH chattel lending that maybe we should?

Scott: I think the bottom line there, Andrew, is you have to follow the money and know that somebody has to finance almost everything in our lives, especially people that are in the real estate business. The real estate gets financed by a certain type of lender. There’s a variety of lenders for the type of asset class that it is. As the asset matures, maybe it’s ripe for CMBS or agency financing, so it evolves and matures that way.

Chattel lending is the same way. We’re putting a lot of people into homes that otherwise would never be able to attain home ownership. They can’t qualify for a stick-built home mortgage through Fannie-Freddie or even HUD. There may be another chattel lending product out there, but again, we have the most flexible terms in the industry. If they’re not able to get a loan through us, they’re probably not achieving that home ownership dream.

The community owner then, as a result, is forced to either rent those units or sit on them and wait until a better qualified applicant comes along, which could be a long holding period. We’re a solution at the end of the day in terms of financing.

Andrew: Yeah, I love that. Getting people to own the homes, I think, is such a mission-driven business model, because they can build equity instead of just becoming this renter nation, which we seem to be leaning towards. Maybe tell us a little bit more about PEP lending and why it’s a good fit for MHP operators. Obviously, the flexible terms are great. The approval rate is positive. What else don’t we know that we should?

Scott: We’re the absolute best solution for park-owned homes and selling off any home inventory you have in your community. If you’re following the model of a land lease community where you don’t want to own homes, you don’t want to have 50 park-owned homes with 50 roofs, 50 furnaces, a hundred toilets, all that stuff that you’ve got to fix, you want to get rid of it, you need somebody like us. You need a chattel lender, because if you don’t use us, you’re going to be financing it yourself. You have to be licensed to do that. It also eats up a lot of capital, and it also eats up a lot of human capital in terms of servicing those loans, et cetera.

We’ve helped countless community owners really build a ton of value in their communities by helping them sell off that inventory. If you have park-owned homes, or you’re going to do an infill plan and bring in some new and used homes, it works with our program either way. It comes down to the community owner wanting to have to sell those units and putting on a good sales campaign, and then we do the rest.

We come in with terms that are very easy to qualify folks. The recourse part, it’s how we’ve modeled it out. But on the other hand, if you don’t have recourse with us, what’s the alternative? The park owner is probably financing those people on some sort of LTO contract, and they’ve got the risk at the end of the day anyway. You might as well have a contingency type risk with us on a buyback for a recourse guarantee versus having all the upfront risk as well.

Andrew: Yeah, that’s interesting. What are the typical terms, Scott, for an end user right now? It’s November 2023, rates are pretty high on any type of housing. What does it look like for MH?

Scott: Rates right now, we’ve been going up maybe not as abruptly as some of the other rates you’ve seen. We’re pricing rates every week and somewhere between 13% and 15% right now on average. Before rates really got out of hand a year and a half ago, we were pricing more like 10%-12%.

Keep in mind, across our average borrower, if you will, these are people that have perhaps some credit challenges in their background. They’re at the lower end of the wage earning spectrum. These are people that don’t have 10%-15% to put down on a home. Our average loan size is about $30, 000, so the home is selling for $30,000-$35,000, maybe $40, 000.

We’ll go up to a $75,000 loan amount and down to a minimum of $7500. But on average, it’s at a $25,000-$30,000 range. We can amortize those payments up to 25 years. But on average, we try to keep it as short as possible, so more like 10-12 years on average.

Andrew: Got you. How do you value these? Do you use NADA values? Do you get an appraisal? How do you value these?

Scott: Yeah, great question. Short answer, we don’t use appraisals. Community owners can price the units however they like. The borrower just has to be able to afford to repay the loan based on the rate in terms. Because we don’t require appraisals, we can close deals very, very quickly. We could even approve an applicant on a Monday and potentially close them on a Friday. It moves really, really quickly. Again, the community owners can price the units however they like.

Andrew: Okay. What’s the typical timeline to get someone approved?

Scott: We tell our community owners, we’ll get them some kind of a response generally within 24 hours or less. It may be a conditional approval, but by that time we would have pulled credit. We’d look at whatever income documents were submitted with the application. If we needed more information, we’d attempt to reach out to the applicant and or community manager who took the application with them to see what else we might need. Our goal is 24 hours.

Andrew: Wow. So it’s realistic to close one of these loans in three weeks?

Scott: Absolutely, yup. If the home is ready, it could be less than that.

Andrew: Wow, that’s great. What’s the typical default rate on your portfolio?

Scott: We track delinquencies of 60 days and older, and that’s generally somewhere between 3% and 4% on a monthly basis. Another question we get asked quite a bit is on the recourse guarantee, and we track that as well. On an annual basis, we see about 6% of our portfolio gets repaid on a recourse guarantee basis. It pays to play the percentages.

If you’re a community owner and we’re only going to do a few loans with you, one goes bad, that’s going to be a abnormally high default rate. But if they’ve got a big community, big infill plan, and we’re closing 10-20 plus loans in a year, then it should follow the averages. We think that’s pretty low, 6%.

Andrew: Yeah, that’s not bad at all. Which states, Scott, would you say have the highest default rates on these manufactured housing chattel loans?

Scott: We don’t track that specifically by state. We’ve noticed everything more or less behaves on average that we’ve been tracking over the company’s history. We haven’t really seen any spikes. Sometimes a sub market may see some stress, because a large employer has maybe shut down, but the economy has been very strong years of late. We haven’t really even seen too much of that activity either.

Andrew: That’s interesting. I’m on a repo list of buying. I’m able to buy with dealers to buy mobile homes that are being repossessed. Month over month, I get this sheet sent to me. It’s two States out of all of them that have the most loan defaults, and it’s Alabama and Mississippi month after month.

Scott: Interesting.

Andrew: I’m just curious. Have you seen anything similar from those states? Why do you think that would be?

Scott: I may not have seen it, because we’re not licensed in those states. We’re in Texas. On our website, we’ve got a map on our brochure of the states we cover, but it’s generally Minnesota down to Texas, east to Ohio, and west to Utah, a big cross shape through the U S. We’re always looking to add states as our community owners need us. I’m not sure why there’s a spike in those states, but I have a feeling maybe some of those areas were high growth for a while, and maybe some of the larger employers pulled back a little bit. It could be one reason.

Andrew: Sure. Scott, what mistakes have you seen some MHP operators make, if at all?

Scott: The biggest mistake we’ve seen, and it’s not really a mistake, but they’ll see a podcast like this, listen to it, and get all excited about channel ending and say, that’s a great idea. I need to have a chattel lender. I need to sell my park-owned homes. They call me, and we go through the whole rigmarole, we get them signed up, and then we never see a single application.

They stall out, I’m not sure why. Maybe they’re not doing it full time. Maybe it’s a weekend hobby park thing. But for whatever reason, there’s still some work on the community owner as part of this process. We try to make it as easy as possible. Our loan officers are trained to chase as much papers as they can and do as much as they can so the owners of the park can really leverage our people and not have to hire their own people. We do have a fair number of people that go through the whole process, we get them signed up, and then we never see or hear from them again.

Andrew: It’s probably applicants coming in, and then they have bad credit or this, that, or the other. What’s your minimum credit score? We talked about the debt to income ratio thing, but if you have a new applicant come in, how do you qualify them quickly to see if they would be a good fit for approval?

Scott: Sure. We get a application. It’s a very simple one page application. Somebody could fill it out in five minutes. Again, I’m trying to keep the whole process simple. Everybody has a credit report pulled on them. We actually stopped pulling reports that had any score on them, because a score was basically just a summary of all the accounts on the bureau anyway. Our underwriters are trained to go through every single account and analyze it.

Bottom line, we don’t have a minimum credit score. We’re actually looking at every account and seeing how it’s been paid. Within that, people may have had a credit hiccup. They may have even had a bankruptcy in the past. But what’s more important and what we weigh more heavily is if they’ve had some good credit that’s been established in the last couple of years.

They had a BK four or five years ago. Okay, but now they’ve got two car loans, they’ve got a couple of credit cards, and they’ve had those out there for 24-36 months paying on it perfectly. That would absolutely be an approval assuming the income checks out as well.

We’re able to really analyze and dig deep on the credit reports in order to approve people, because we know we’re not working with 700-800 FICO scores here. These are people that if they were being scored, probably have in the 600s, maybe sometimes even a little bit lower. Bottom line, no minimum credit score.

Andrew: That’s good to know. What’s the biggest threat to mobile home park owners using a program like yours with the chattel lending?

Scott: Biggest threats? It may be if you grow really fast. We’ve seen programs where people are just really, really burning and turning through a community. I’m talking selling 10 homes a month, and we’re doing tons of loans. They get it full after 12 months, because they’re moving so quickly. All those loans were put on the books at the same time, and it marches along lockstep as time goes by, as the portfolio gets seasoned.

Sometimes you’ll see, in the 30-36 months, people tend to sometimes fall out of a contract. If you’ve put on a ton of loans all at the same time, they could all fall out at some point down the road together. That’s really the only thing I’ve seen where there’s any real downside, in my opinion. If you’re going on evenly, moving along, and maybe it’s a two or three-year infill project, then you’re playing the percentages, and the averages should work out in everybody’s favor.

Andrew: Yeah, that’s interesting. That’s a good perspective, Scott. From your perspective, if you are going to invest passively into a mobile home park syndication or into a mobile home park investment fund. What do you think would be the top things you would want to know or look out for knowing what you know about manufactured housing?

Scott: Yeah, for sure. I invest on the side as well. Also, I’m interested in these things. Bottom line I think is the return. How much cash am I putting in? What’s my return? What’s the investment strategy?

Is it a current return of cash, or are we building up the community to flip it to a bigger player in three to five years? What’s that investment horizon look like? What’s the infill plan? What’s the turnaround plan? Does the sponsor have the people, the history, and the experience to be able to implement that plan?

There are lots of communities out there that are 50%-60% occupied. Somebody wants to buy it, fill it up, so it’s 90%-plus occupied so they can flip it to agency financing. Great plan, but how are you going to get there from point A to point B? You need the real estate lender for the park. You need the chattel lender. You probably need a line of credit to get the homes there and set up, et cetera.

There’s a number of different moving parts that really have to come in to make the plan come together as they used to say on the A team. There’s a lot of moving parts, and I think it comes down really to the experience of the sponsor. Tons of money to be made in mobile home parks for sure, but it’s all on making the plan come together.

Andrew: Definitely. One thing that I was just thinking of, because you guys are based in Illinois. We stopped targeting Illinois a while back just because of some of the blue politics and the more tenant friendly laws. I’m curious if you have anything based on running your business out of Illinois. If there’s anything that you’ve noticed that maybe is a little bit extra regulation compared to running the business in another state.

Scott: Sure. I’d say generally, it’s probably a disadvantage just based on some of the tax structures that are out there.

A lot of the communities we’re working with are not in Cook County, which is the biggest county in Illinois, encompasses Chicago and a whole lot of other cities there. That’s where a lot of the negative publicity comes from, I believe, but there are lots and lots of counties and jurisdictions downstate that have their own taxing authority and have their own judicial systems, court systems set up.

Probably not as bad as what you’ve heard about. That is the news that comes out of Cook County, but I’m sure there’s other states that are probably great to do business with no matter where you go in that state. There are certainly parts of Illinois where it’s still profitable and easy to do business, lots of rural downstate areas with lots of manufactured home communities.

Andrew: Awesome. Scott, thank you so much for coming on the show. If any of our listeners would like to get a hold of you or PEP Lending, what’s the best way for them to do so?

Scott: Yup, absolutely. They can call me directly, which is 708-253-6010 or go to our website. It’s peplending.com.

Andrew: Awesome. Thanks again for coming on the show.

Scott: You’re welcome, Andrew. Thanks a lot. It’s been a pleasure.

Andrew: That’s it for today, folks. Thank you so much for tuning in.

Would you like to see mobile home parks values and projects in progress? If so, follow us on Instagram @passivemhpinvesting for photos and awesome videos from our recent mobile home parks acquisitions. Once again that’s @passivemhpinvesting on Instagram. See you there.