Are You An Eagle Or An Oyster?

Last week’s column brought in lots of calls and emails asking for more information about how we buy mobile homes for cash and then sell them with terms.  The two most common questions we received were: 1) How do we determine our purchase price?  2) How do we determine our sale price?

Today, let’s answer these questions.  Oh, and if you think this is boring stuff, then you must think 70% yields on your investment dollars is boring stuff, too.   

Let’s look at how we determine our purchase and sale price.  For this example, let’s assume we’re thinking about buying a fifteen-year-old, two-bedroom, two-bath singlewide mobile home in a park.

First, we investigate to see how much other 2/2 properties are RENTING for in the area.  Let’s say, between apartments and single-family houses, the average rent in the immediate area is $700 per month.

Next, we set $600 ($100 below what the average person is willing to pay in rent) as the maximum amount someone would be willing to pay to OWN the trailer.  (The $600 includes lot rent, trailer payment, insurance and property taxes)

Let’s do the math.  Assume lot rent is $300/month, insurance is $30/month and taxes are $17/month.  When you subtract the expenses from the $600, you get $253.  ($600 – $300 – $30 – $17 = $253)  Let’s round off $253 down to $250.  This gives us the highest amount we can charge the buyer as a monthly trailer payment.

We now have enough information to set the sale price.  With this trailer, experience has taught us that we can ask $8,000.

Now let’s set up the sale terms: Normally we get $500 down and charge 18% interest.  Plug the numbers into your financial calculator and you get a $7,500 note with monthly payments of $250 at 18.98% interest for 41 months.  (REMEMBER: Most buyers only want to know 3 things: 1) How much are the payments?  2) How much down?  3) When can they move in?)

Finally, it’s time to set OUR maximum purchase price.  To do this, we first need to figure this deal’s total purchase expenses.  Our due diligence tells us the trailer needs $1,000 in repairs and it will take two months to sell.  We calculate the holding cost for two months to be $740.  ($300 (lot rent) + 30 (insurance) + $40 (utilities) = $370 x 2 months = $740.)

We need our total all-in purchase price to be no more than 50% of the $8,000 sale price.  Let’s do the math: $4,000 (1/2 of $8,000 sale price) – $1,000 repairs – $740 expenses = $2,260 maximum purchase price.

I’m not fond of starting out at our maximum purchase price – no wiggle room – so my initial offer is $2,000.  Also, I never initially offer all cash.  So our offer would look like this: $1,000 cash down and we give the seller a note for the balance and agree to make 20 payments of $50/month until the $1,000 note is paid.  We make sure the first payment isn’t due for at least 60 days – we need time to rehab and market the home.  

Now let’s talk yield.  If you buy this trailer for $2,000 and your all-in purchase price is $3,740 ($2,000 + $1,000 + $740), and you sell it two months later for $8,000 with the above sale terms, your yield is a mind-boggling 73.12%!

Now let’s try to make this investment even better.  About 10 days BEFORE I’m due to make my first $50 payment to the seller, I send them a letter making the following offer: I will begin making my $50 monthly payments in a few days, OR, if they prefer, I will send a single payment of $300 in exchange for the 20-month note I gave them at the time of purchase.  All (except one person) has agreed to short the note and take a cash payoff instead of receiving monthly payments.

If the seller accepts our short offer, let’s see what happens to our yield.  Our new all-in purchase price is $3,040 ($1,300 (revised purchase price) + $1,000 (repairs) + $740 (expenses) = $3,040).  After plugging the numbers into our financial calculator, we get a new yield of 94.24%.  Incredible!     

Is investing in mobile homes risky, and does it require hard work when compared to a bank savings account?  Absolutely!  But then, I was taught that getting a 73% yield is better than getting 1% interest at the bank. 

America was built on the backs of folks who BELIEVED that success requires risk and hard work.  It’s your choice, are you an eagle or an oyster?  Eagles go out everyday and hunt for their very existence, while oysters play it safe, anchor themselves to the ocean floor and go nowhere. So which is our national symbol – the eagle or the oyster?