If you have researched all the incredible benefits of mobile home parks as real estate investments, and want to take the first step to becoming a park owner, you'll need to figure out how to pay for your first park. For those that don't have ability to buy a park outright in cash, there are a number of good options for financing. Some are unique to mobile home park investing, while some fall within the realm of traditional commercial real estate financing. Though many options exist, this post is dedicated to one particular method of financing a park purchase that is rarely seen in other types of commercial real estate: seller financing.
As the name suggests, in a seller financing deal the seller finances the sale directly, without any involvement from a bank or outside investors. Typically this type of financing is only available in cases where the seller owns the park free and clear. Fortunately a significant percentage of mobile home parks, particularly "mom and pop" parks owned by individuals, are owned free and clear and can be sold with seller financing.
Seller financing has a host of benefits over more traditional bank financing options. Often this type of deal won't require a credit check, and there won't be a loan committee overseeing the loan. It's common for seller financing deals to have lower down payment requirements compared to bank financing, and in some cases they can have zero down payment. This allows the buyer to acquire a more valuable property as less initial capital is needed.
If the seller requires a down payment greater than the buyer can afford, they might be willing to negotiate a deal where the down payment is paid over a period of one, two, or three years. As long as the park generates enough income to cover both the monthly loan payments and the additional payments toward the down payment, the buyer will be building equity while paying off the down payment, and generating income once the down payment is met.
Generally seller financing deals are non-recourse, meaning the lender has no claim on the borrower's other funds or assets in the event the borrower fails to repay the loan. The lender will still be able to take possession of the park and resell it to a different buyer, but if for some reason the park doesn't sell for at least as much as the borrower owes, the lender cannot go after the borrower's other assets to make up the difference. This provides a measure of protection for the buyer in a worst-case scenario, but given the seller's knowledge of the park's reliable profit generating potential, they will often agree to a non-recourse deal.
Other benefits of seller financing often include flexibility in the loan term and the loan amortization, and the allowance for assumption of the loan by another buyer in the event the borrower wants to get out of the deal. And seller financing doesn't just benefit for the buyer, it can also benefit the seller by avoiding the large capital gains tax a cash sale would incur, and provide a steady, dependable income stream for many years after the sale.
The best seller financing deals can generally be found with parks owned by individuals who are looking to retire from the daily responsibilities of owning and managing their park, but want to keep a consistent income stream. Selling a park through seller financing minimizes the seller's tax liabilities, and with the right interest rate and amortization period, guarantees a monthly income for an extended period of time. If the seller were to sell their park for cash, and invest that cash directly in stocks, or invest in mutual funds, there could be substantial risk of losing those investments. By instead investing in a seller financing deal to sell the park, the seller gets a guaranteed interest rate on an investment secured by a tangible asset he or she knows is capable of producing reliable profit.
Beyond the flexibility offered to both the seller and buyer, seller financing avoids the fees and paperwork associated with the traditional bank financing. Seller financing is a unique and valuable tool for buying and selling mobile home parks, and should be seriously considered if you are looking to invest in a park.