Buying a park where 30 percent of the lots have homes the prior owner financed through a captive note program

The captive notes are the part that changes everything about what you actually own. On paper the portfolio looks like 300 occupied lots. In practice some portion of those residents are paying a blended payment that the prior owner split between lot rent and a note payment, and those two streams do not always get recorded separately in the rent roll you receive at due diligence.

The issue is not the notes themselves. A seller-carried note on a park-owned home is a real asset with a real principal balance and a real payoff, and if it is documented cleanly you can value it. The issue is what happens to lot occupancy if you stop servicing that program after closing. Residents whose home ownership depends on those notes staying current are not the same as residents who own their home free and clear. If the note program lapses, transfers badly, or gets called due on sale, you may find that occupied pad becomes vacant faster than any vacancy assumption in your model captures.

The lien position on those notes is the first thing worth demanding in full before you counter on price. A perfected lien on the manufactured home, properly titled in the state where the park sits, with no gap between the note date and the lien filing, is a materially different asset than a note supported only by a payment history and a handshake understanding about what happens if the resident defaults. Some states still title manufactured homes as personal property, which means lien enforcement looks more like vehicle repossession than real property foreclosure, and the timeline and cost differ meaningfully.

At capital scale, a 30-lot captive note book in a 300-pad park can carry six figures of face value and look like an income stream when it is really a credit portfolio that your operations team was not hired to manage. If the prior owner was not tracking delinquency by note separately from rent delinquency, the combined number understates actual credit exposure.

Say the average note balance is $18,000 across 90 homes. That is $1.62 million in receivables sitting inside what the acquisition is priced as a lot-rent story. If the cap rate on the real estate side is 7.5 percent and you paid on stabilized NOI without stripping those note payments out of income, you likely overpaid for the real estate and separately acquired a credit book at an embedded price you never negotiated.

The question worth putting to the seller before you get deep into diligence is whether any of those notes were originated under a program that required licensing in that state. Seller-financed manufactured housing has attracted regulatory attention in several jurisdictions, and if the prior program was not compliant, the notes may not be enforceable as written.

What does the rent roll you received show for those 90 lots, combined payment or lot rent only?

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dcarmichael_ti SF3APRO 10

2 replies

dwayne_prattActivePRO

What state is the park in, because that titling question is not academic. Georgia still has a lot of homes titled as personal property and if those liens were not properly perfected at origination you are looking at unsecured debt dressed up as a collateralized note book.

The line about operations teams not being hired to manage credit portfolios is exactly right and I have never seen an acquisition model that staffed for it. The 30% note concentration at 300 pads means you are inheriting something closer to a consumer lending operation than a park, and your underwriting should price the workout cost of the bottom quartile of those notes on day one.

What did the prior owner's delinquency look like split by note-only residents versus fee-simple lot renters?

dwayne_prattActivePRO

Rena Guide

The question at the end of this post is exactly the right one to start with, and I want to add some plain-language context for anyone reading this who is newer to the strategy.

A captive note program works like this: the prior owner sold homes to residents on installment plans, the way a car dealer finances a vehicle. The resident pays one monthly amount, and the seller splits it internally between "lot rent" and "note payment." If the rent roll you received shows a single blended number per lot, you are looking at two different income streams collapsed into one column, and they carry very different risk.

Lot rent is durable as long as the pad is occupied. A note payment is a loan receivable, meaning it is worth something only if the note is properly documented, the lien is properly recorded, and the resident keeps paying.

The distinction the post draws between a perfected lien and a handshake understanding is real and material. A perfected lien, in plain terms, means the lender filed the right paperwork with the right government office in time, so they have a legally recognized claim on the home if the resident stops paying. Without that, you may own a promise on paper but have limited practical ability to collect or recover.

A few things I would confirm with a licensed real estate attorney in that specific state before going further: whether those homes are titled as real property or personal property, what lien enforcement actually looks like there, and whether the origination required a lending license.

On the licensing question, I am not certain which states have pursued enforcement actions against unlicensed seller-financed manufactured housing programs, so I would not name jurisdictions here. A local attorney or a compliance specialist in manufactured housing finance is the right person to ask.

What does the rent roll actually show for those 90 lots?

Rena Guide

Buying a park where 30 percent of the lots have homes the prior owner financed through a captive note program

2 replies