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COMMUNITY CONSULTANT Top 10 Types of MH Communities To Avoid If You Want To Succeed BY FRANK ROLFE People often ask us the secret to our successful growth to 18th largest in the U.S. The answer would be something that General Montgomery said in World War II, we "never get involved in a battle that we cannot win". Over the years, we have learned what is an opportunity from what is not an opportunity. And we stay clear of problem communities because we know the odds of winning are low and can actually sink the ship if the damage is large enough. Here are the Top Ten types of communities that we stay away from. Low Single-Family Home Prices This is a very common trait in certain parts of the U.S. You can have single-family home prices in the $20,000 to $30,000 range. I'm not talking falling-down shacks, but nice white frame houses with black doors and shutters and a garage. You can't compete with this type of product, as the monthly mortgage will be less than your community's lot rent. That's why there is such low occupancy in communities in southern Illinois – you can buy a great home for next to nothing there. Low Market Lot Rents In some parts of the U.S., the average lot rent is under $100 per month. There is no profit in this type of business model. We have no interest in owning communities that generate only $50 per month per lot in profit – and neither should you. Think of it this way: a community with $300 per month lot rent has over 300% more profit than one with $90 lot rent – and it takes the same amount of work. Extremely Low Occupancy One thing you should have gleaned from this publication and the official statistics of manufacturing production of homes is that very few are sold these days (400,000 units per year in 1999 versus less than 60,000 today). If you have vacant lots, you'll have to buy the homes to fill them yourself. And that's very capital intensive JUNE 2013 22 THE JOURNAL to do. Sure, we buy communities all the time that are 70%, 60% -- even 50% occupied in certain cases – but we never buy a community that is less than 50% occupied. Those are extremely costly and risky projects. No Operating Permit You cannot ever buy a manufactured home community that is illegal. Never. Sure, the current owner will tell you they've never had a problem so far. That's great for them. But the city might shut you down the day after closing, and you will never be able to handle that disaster. So don't do it. Failed Phase I Environmental We don't buy communities that have environmental pollution issues. We always get a Phase I, and we always cancel the deal if it fails that test. No exceptions. Any Private Water or Sewer System with No Back-Up Plan It's O.K. to own communities with private water and sewer systems (wells, septic, lagoon, packaging plant, etc.) but NOT if there's no back-up plan to fix it when things go bad. We recently dropped a deal in west Texas that had a septic system that you cannot fix without violating grandfathering and effectively losing the entire community. If you buy a private utility system, you need to have a plan to fix or replace it, and the capital to do it. Communities with No Upside Denver is a good example of this. Many communities in Denver have lot rents of $700 per month. This makes no sense, as you can rent a really nice apartment or stick-built home in Denver these days for that amount. The lot rent should be more like $500 probably. So it will be extremely hard to raise rents there. We hate communities that we cannot perpetually raise rents in – there's no way to increase net income and, with rising taxes and other costs, you might actually go backwards. Catastrophic Flood Plain We're not talking communities with a risk of losing a few lots or a playground to a flood. We're talking entire communities that can be wiped out. This is way too risky. Communities With Poor Test Ad Results If you do not have demand for your product, you cannot build a successful business. If you do not have demand, you will be too afraid to evict residents for non-payment, as you're not sure how you can get new customers back. We are extremely committed to market testing prior to buying a community. It perpetually keeps us out of trouble. Over-priced Communities We only buy communities that can make or break a 9% cap rate going in. We have no interest in buying communities at low cap rates. Sure, there are REITs that will buy portfolios at 6% cap rates. But that's not our business model. Real estate runs in cycles, and we have to have solid margins –and the ability to grow those margins – from day one. Conclusion To succeed in the manufactured home community business, sometimes it's as important what you don't buy as it is what you do buy. It's worked for us for almost two decades, and it can work for you. T J Frank Rolfe has been a manufactured home community owner for almost two decades, and currently ranks as part of the 18th largest community owner in the United States, with almost 7,500 lots in 17 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. To learn more about Frank's views on the manufactured home community industry visit www.MobileHomeUniversity.com.