Lately, we’ve discussed various ways of obtaining financing to buy a mobile home park without using a bank for the loan. Nothing against banks, but the new down payment requirements, even if you can afford them, are not a good use of your cash. The real profit potential in the Jason Hartman style of investing requires that we put as little of our own money into the deal as possible. Today’s 20 to 25 percent demanded by the traditional financing industry is simply too much if you can avoid it.
One way to get around the ludicrously high money down requirement is to obtain seller financing. Here’s the scenario. A good rule of thumb tells us that around 30% of all mobile home parks are owned free and clear. Many are mom and pop businesses that have been run by the family for decades. This is the kind of opportunity you need. With this scenario, a seller knows that the park is a positive cash flow machine. It’s profitable and will continue to be as long as the buyer isn’t an idiot. By the way, to get the seller financing you so desperately crave, you’re going to have to convince the seller you are, in fact, NOT an idiot. Hopefully that won’t be too hard.
Why would a seller want to take on the perceived risk of financing the purchase? Let’s look at it his from his point of view. To sell the park outright incurs a huge capital gains tax, which most sane Americans prefer to avoid. Thanks to depreciation and other business deductions, the seller is used to paying very little in taxes. His primary goal is to let go of the responsibility of managing the property. Financing the purchase for you allows him or her to keep the monthly cash flow they’ve become accustomed to (your mortgage payment).
These are the points you need to make when approaching a seller about the possibility of financing the mobile home park for you. The bottom line is twofold:
1. You take the responsibility of the park off his or her shoulders.
2. They get a nice income stream at minimal tax risk and a fair interest rate.
The great thing about seller financing is the terms can be anything the two of you agree on. No pesky bank rules and regulations to worry about. You should be aware the seller can still ask for 25 percent down, but maybe he won’t. Maybe you could offer to pay a bit higher interest rate in return for a smaller down payment.
The ultimate task to make this strategy successful is for you to convince the owner you’ll make each and every payment AND continue to operate the park profitably. (Top image: Flickr | Tax Credits)
The Commercial Investing Center Team