INTRODUCTION BY GEORGE ALLEN, CPM:

With the recent reduction in the capital gains tax percentage, manufactured home community owners across the U.S. have been asking: "How can I find qualified and motivated prospective buyers and real estate investors willing to pay top dollar for attractive, well-managed properties?"

The answer is simple: Do it yourself with an assortment of ads and expect to get a wide variety of responses or retain a broker-specialist who is knowledgeable about manufactured home communities as an asset type.

In the meantime, here is the seasoned advice of one such specialist. Susan McCarty of Belgravia MHC Realty. She is the only real estate broker, exclusively marketing manufactured home communities on a national level She is also the creator of Community Investor TM, a proprietary database offering selective marketing to qualified and motivated investors.

I asked Susan to prepare the following article in recognition of her 15 years in the manufactured home community business as a property manager, trade publication author and real estate broker-specialist.

Allowing an independent, third-party broker-specialist to negotiate on the owner's behalf is beneficial in two ways: It removes the emotional element and tactfully answers objections raised by inquiring prospects, without taking offense. A broker-specialist's knowledge of how to assemble and facilitate an entire transaction can lead to a "closed deal." which is the ultimate goal of every seller-broker relationship.

Where does one find a real estate broker specializing in the sale of manufactured home Communities? There are several ways:

• Ask peers in the industry for referrals.
• Review classified ads in the back of industry publications.
• Contact your state manufactured housing association staff for names of broker-specialists operating in your state. [Also. see Appendix L of How to Find, Buy, Manage & Sell a Manufactured Home Community, which contains a list of about 75 such professionals.

It is important to understand how potential investment properties are evaluated and appraised by prospective buyers.

Among the elements use to calculate the value of a property are several key characteristics that determine the appropriate income capitalization (CAP) rate for the property. These include:

• The location of the property in relation to population centers, major employers. visibility and ease of access.
• The number of existing, rentable homesites.
• The size of the homesites and their installation stability, as well as their ability to accommodate new, larger homes.
• The source of utilities (private vs. municipal) and their condition.
• The amenities and features of the property. (Are they bare-bones, or is there a full complement of attractive features?)
• The overall curb appeal of the property. (How does it look to some-one just passing through?)

Income considered

When considering the income generate by a property, an owner needs to consider:

• The rent collectable from occupied homesites for most recent 12-month period.
• The discounted value of ancillary income, such as from rental homes. the sale of new homes and the resale of existing ones, as well as laundry service, insurance and so on.
• The discounted value of potential income from existing but vacant homesites.

Expenses considered

Weighed against income, the property owner should look at operating expenses for same 12-month period as income. These expenses include:

• Administrative expenses-management, wages. administrative costs, telephone and advertising. (These expenses should not be more than 13 percent of total income.)
• Operating expenses-supplies, heating, electric, water and sewer service. (Limited to 11 percent of income.)
• Maintenance expenses-repairs and wages. (No more that 8 percent of income.)
• Taxes and insurance real estate and other taxes, licensing and property insurance. (Also 8 percent of in-come.)

In addition to operating expenses, other expenses need to be considered, including existing debt service (i.e., mortgages), and payments to partners or co-owners. Still other expenses that are usually considered separately include expenses related to home sales and rentals.

Valuation adjustments are generally made for:

• The density of homesites (i.e., the number of homes per acre). The industry norm is five homes per acre.
• The economic occupancy (i.e., the measure of rent collection efficiency).
• The rent level relative to local market conditions and competition.
• The existence of rental homes on-site and their proportion of the total homes.
• Rent control rules in effect at the state or local level.
• The availability of additional raw land adjacent to the property, undeveloped, but properly zoned.

The next important hurdles to clear are getting the community ready for sale and understanding what the marketing process will entail.

To prepare the property for the critical eyes of real estate brokers, prospective buyers and value appraisers, three tasks must be performed:

• The property should be spruced up to ensure the very best curb appeal possible.
• Complete and accurate financial records must be made readily available.
• An independent third party should appraise the property after the first two tasks are completed.

Once these preliminary tasks are performed, the usual steps needed to complete the sale of a manufactured home community are as follows:

• Estimate the asking price, based on results of the appraisal and additional considerations, such as broker fees and negotiating margins.
• Identify and meet with the specialist-broker to discuss acceptable alternative terms of sale.
• Negotiate the terms of the property listing agreement.

Another type, the open listing agreement, allows as many brokers as desired to represent the community. But only the broker who sells the property receives the commission.

With this type of agreement, there is little motivation for a broker to actively market a property. There is far too much risk that the broker will not realize any return for effort he expends on advertising and repeatedly showing the property.

Still another type of listing arrangement is the exclusive agency agreement. The broker can tie up a property for marketing purposes. but the property owner retains the right to sell the property without being liable for any commission to the broker.

This arrangement often requires the owner to execute registration documents, assigning commission rights to the broker for certain prospective buyers.

After the type of listing arrangement is agreed comes the search for a qualified and motivated buyer for the property. This Involves showing the property to prospective buyers.

The following is a list of information generally researched by prospective investors before submitting an offer to purchase or intent letters:

• The name, address, legal description and telephone number of the property.
• Accurate travel directions to the property.
• Characteristics of the property. Is it for families or all adult; urban, rural or resort? Investors also need to know the homesite sizes, configurations and density; the condition of utilities; the local market demographics and economic trends; and property's amenities and features.
• The physical occupancy level, relative to the total sites available and developed.
• Physical occupancy vs. economic occupancy. How efficient Is the rent collection?
• Name of the owners) and manager, as well the type of ownership sole proprietor, partnership or corporation.
• Some color photographs of property.
• A basic income and operating expense report on he property's operations.

Next comes the offer to purchase or intent letter submitted by the prospective buyer. This document outlines some of the major details to be agreed upon that will be addressed in greater detail In an eventual purchase contract.

The terms of offer to purchase may be accepted as is or negotiated. These terms may include the purchase price, the due-diligence Inspection period, the amount of earliest money. the seller finance terms (if appropriate) and the closing period.

At this point, the purchase contract may be drawn by either party. Often this Is where a broker-specialist can be of considerable assistance, drafting a document specific to the needs of the particular manufactured home community sale transaction.

A seller should always have legal counsel review the final draft of the purchase contract before signing. The main terms of the purchase contract will be drafted from the accepted offer and expanded upon in greater detail in the final agreement.

The accepted purchase contract will set the wheels in motion with regard to specific due-diligence Issues. Here, the so-called "M's of Management" offer a simple, yet comprehensive checklist guide:

• Manpower. Personnel and labor issues, such as titles, responsibilities, wages and benefits.
• Machinery, Office and maintenance equipment, vehicles and matters relating to utilities.
• Materials. Personal property listing of materials, supplies, services, inventory, contacts.
• Money. Operating statements for the past two years, including all forms of income and operating expenses for the property. as well as tax returns, the current rent roll and rent records.
• Methods. The Standard Operating Procedures manual for ongoing operations including leases, addenda, rules and regulations, blank forms and office files.
• Maintenance. Deferred maintenance items to address, engineering plans ("as builts") and street maps for the property, preventative maintenance schedules and listing of subcontractors.
• Marketing. The market survey, the resident profile and mix and current promotional efforts.
• Management Resident records, the condition of the facilities, management to be retained after the sale, level of training achieved and needed and motivation.
• Miscellaneous. Resident relations, local community contacts, several on-site inspections by the due-diligence team, staff interviews, a local law enforcement meeting.

The final settlement and closing are conducted by legal counsel; a record transaction is filed at the city or county courthouse. A record of the transaction is also kept for tax reporting purposes.

The very nature of these steps should convince community owners that they need the assistance of a broker-specialist when the time comes to sell their investment properties.

Susan Mccarty is a broker-specialist for Beigravia MHC Realty. Indianapolis, and creator of the Community~Inve5torTM database. For additional information, call her at 317/889-6465.

George Allen, CPM, founder and owner of GFA Management Inc. and PMN Publishing, is a management consultant to the real estate investment and manufactured housing industries, with corporate clients throughout the US, and Canada. A frequent seminar facilitator and investment property troubleshooter, he is also the author of three popular business texts and pens the monthly Allen Letter, as well as columns in this and other notional trade publications.

For further information, including a free copy of the Valuation Calculation Worksheet (VCW) mentioned in the article, call Allen at PMN Publishing, 317/888-7156, or write to him at GFA Management, P.O. Box 47024, Indianapolis. IN 46247

Manufactured Home MERCHANDISER
October1997
Reprinted by permission

Contact the Author:
E-Mail SMc4464@aol.com
Visit George Allen's Web Site:
http://mfdhousing.com/gfa