Issue link: https://read.dmtmag.com/i/370270
We have been aggressively buying REO prop- erties from a myriad of banks. Some deals come through brokers and some from auctions. But they all have the same theme in common: borrowers who do not meet their obligations and, in some cases, do so as a calculated gamble to improve their position. This bad behavior on the part of some community owners has the risk of punishing the rest of us, and needs to be addressed. It is never appropriate to default on a loan My partner and I have never missed a note pay- ment in our lives. We would be horrified at the concept. That's why it's amazing that some own- ers are so lackadaisical about letting a loan go into default and actually see this as a natural course of business. Perhaps there was so much press regard- ing foreclosures from the 2007 housing bust that people have come to believe that this is appropri- ate and normal. It's not. It's embarrassing and never acceptable. Even worse are the cases in which the community owner lets the property go back with the intention of buying it back as REO at a lower price, thereby sticking the lender with a loss, and reducing their basis in the property. Is this even legal? It shouldn't be. How can you screw this business up? In many of these REO deals that we buy, the turn around on the community is incredibly easy. Sometimes it's nothing more than enacting pro- fessional-grade collections policies, or getting the vacant homes renovated and put back into serv- ice. But it's nothing that spectacular. With the demand for affordable housing so strong, you have to be a certified idiot to fail with a property unless it's in a terrible market (and even then, you have to wonder if the former owner knew the concept of "due diligence"). What ever happened to the "fighting spirit"? I am amazed at the lack of "fight" in the former owners of communities we have bought as REO. There's no passion, no aggressiveness. Look at all the times in world history in which impossible odds were overcome by spectacular effort. Would Britain still be around today if they had just tossed in the towel rather than unite behind Churchill? Have you ever read the story of King Baldwin IV, who attacked an army of 25,000 with only 500 knights and won the battle? Maybe the lenders need to require a course in "the will to win" for every borrower, or at least give them a book on Audie Murphy. They should attack the problem at least a year ahead On a recent REO purchase, the former owner became irate when I mentioned that they should have made their payments if they did not want to lose the property (they were whining that we had "stolen" the property from them by buying it as REO). They indignantly retorted that they had not missed their payment, but had merely gone into "term default" – as if that's any better! Any operator who does not begin the process of refi- nancing a community at least a year ahead is their own worst enemy. If you start with plenty of lead time, and you can see that you are going to be un- able to get a new loan, you can then go about ag- gressively selling the property before the note comes due. Many owners who go into REO are the victims of laziness and procrastination. I have had community owners call me about buying their property only thirty days before the note is due. How is that logistically possible? You know what, starting two years ahead is even better than one. The bottom line is that you can never start early enough to protect your interests. Those who default should be punished in the form of being denied more credit How many people in this industry have lost a property – or a whole portfolio – and then re- emerged with a new string of borrowings a short time later. How can you default and then be trusted to make your payments a second time? While this is a business decision on the part of the lender, I would propose that any borrower who fails should be marked with a scarlet letter, rather than trusted again. I can think of at least two large portfolio owners who have a track record of fail- ure, and yet are ready to raise money again a cou- ple days after their last collapse. Is this madness? Absolutely. A dangerous precedent We all know what happened in 2000, when so many manufactured home owners defaulted on their mortgages. The resulting collapse in lender confidence plummeted sales from 400,000 units then to around 60,000 now. While manufac- tured home community loans still have the lowest rate of default of any U.S. real estate sector, we should not endanger that statistic with sloppy at- tention to detail, poor management and accept- ance that letting a property go back is O.K. Maybe a little peer pressure will help spur owners on to a more proactive battle plan to not let such defaults happen. Conclusion While the number of borrowers who are caus- ing the REO supplies to swell is not large, some of the names are shocking. We should not allow the industry to slide into malaise regarding forfeiture, which will diminish lender confidence for all of us. Affordable housing is not a difficult business model to succeed at, and losing a property is never a virtue. Spread the word. Frank Rolfe has been a manufactured home community owner for almost two decades, and currently ranks as part of the 15th largest community owner in the United States, with more than 10,000 lots in 17 states in the Great Plains and Midwest. His books and courses on commu- nity 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. SEPTEMBER 2014 22 THE JOURNAL Community Owners Behaving Badly BY FRANK ROLFE COMMUNITY CONSULTANT T J