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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

© Pentagon Properties, Inc. 2016

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L-O transaction #1

L-O transaction #2

L-O Article

PQW Article

Lease-Option

Spencer Roane

Pentagon Properties, Inc. Atlanta, Ga.

“Financing” of

MHs in Iowa

Thank you Iowa MHA!

LLCs



L-O MHs in LLCs • Background

• History of seller-financing

• Why seller-finance today

• Legal basis for L-O

• Transaction structure

• Defaults – New v Used, SW v DW

• ???? default reductions

• Myths

• FAQ

Background, qualifications,

limitations

Small Operator (fulltime)

4 LLCs, Ga. & Tx., 450 Sites

32 yrs., mistakes, some learning

25 yrs. of MH cost, sales, &

finance data

Small samples

Texas economy

Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 4


Background, qualifications,

limitations

Representative experience?


Qualifications (limitations)

NOT Attorney

Accountant

Expert

Consultant

First Home Purchased – 5/22/91 Stk. 101 – ’91 Peach State 24x54 3/2


5/22/91 Stk. 101 – ’91 Peach State 24x54 3/2 $15,110 mfg. invoice , $22,133 total cost,

$24,839 sales price

8

First L-O “Sale” – 6/11/92 Stk. 102 – ’91 Peach State 24x54 3/2



Stk. 102 – ’91 Peach State 24x54 3/2 $2,376 downpmt. (option pmt.), $362/mo., 19.5 yrs.,

$4,376 purchase price


Stk. 102 L-O Amendment

Amended: 12/22/03

2007 exercise date (15-yr. term)


Qualifications (credentials?)


25 yrs. of MH cost, sales, & finance

data

~301 MHs, ~62 new, ~239 used

~805 sales transactions (90% L-O,

4% Conv., 4% Cash, 1% Other)

136 paid off!

Photos of Pentagon

Properties, Inc. residents

who paid off L-O

contracts and received

titles


Our homes

New

Spec

Options, features (CSH)

Decks

Skirting

A/C

Landscaping


Qualifications (credentials?)


25 yrs. of MH cost, sales, & finance

data

~300 MHs in 700 L-O transactions

136 tenant homeowner!

Same L-O contract

‘08 SAFE Act – MLO & MB



Iowa L-O Accomplishment! • Joe Kelly (5/16)

• Davis Brown Law Firm • Jodie McDougal, Emily Stork,

Sean Raisch

• Iowa Department of Banking

• Benefactors: Iowa COs,

Mfgs., Consumers, Lenders,

services/suppliers, IAMHA.

Others elsewhere.


New MH Iowa Sales Potential

500-600 MHs/yr. shipped currently

150-200 LLCs w/ 100+ sites

~20,000 sites in LLCs w/ 100+ sites

~3,000 vacant sites (15% vacancy)


New MH Iowa Sales Potential

~3,000 vacant sites



History of seller-

financing


Seller-Financing

Old days – no need

Land-home – increased vacancies

Repo homes – nice, cheap, plentiful

Promissory note, am. schedule, etc.

S.A.F.E. Act (‘08)

Home only


Seller-Financing – Old Days $40k sales price

10% downpayment

Promissory note

10%/yr. 12 yrs., $430.23/mo.

Amortization schedule, payoff

Cannot originate mortgage

without licenses,

disclosures, etc. etc.



Why seller-

finance?



Why seller-

finance?

Fill vacant lots!


Filling vacant sites in

our communities • Increase cash flow

• Increase value


LLC Value in 10 Years100 space community

25% vacant

$300/mo. lot rent

35% OER

5%/yr. increase in lot rent & expenses

8% cap rate

No vacant lot filled


No Vacant Lots Filled

Year >> 1 >>>> 10

Income $270,000 $418,859

Expenses $94,500 $146,601

NOI $175,500 $272,258

Value $2,193,750 $3,403,226

Increase in value $1,209,476


LLC Value in 10 Years100 space community

25% vacant

$300/mo. lot rent

35% OER

20% marginal OER

5%/yr. increase in lot rent & expenses

8% cap rate

25 lots filled years 2-4


25 Lots Filled Years 2-4

(20% OER on new lots filled)

Year >> 1 >>>> 10

Income $270,000 $558,478

Expenses $94,500 $174,524

NOI $175,500 $383,954

Value $2,193,750 $4,799,422

Increase in value $2,605,672


25 Lots Filled Years 2-4

(20% OER on new lots filled)

Year >> 1 >>>> 10

Income $270,000 $558,478

Expenses $94,500 $174,524

NOI $175,500 $383,954

Value $2,193,750 $4,799,422

Increase in community value $2,605,672

Value of 25 filled lots $1,396,195

Value per filled lot (1) $55,848

(1) Excluding home sales or financing profit


Filling vacant sites in

our communities • Increase cash flow

• Increase value

• Reduce common area costs

• Upgrade appearance

• Upgrade clientele


PLUS …

MH manufacturers want

our business CSH homes

Options/Features

Changing procedures - sales,

delivery, service, warranty


New MHs Purchased by COs



Legal basis for

Lease-Option

Definition of L-O terms:

• Option - right, but not the obligation,

to buy the home in the future at a

specified amount

• Option payment - amount paid up

front for the option

• Option price - amount the house can

be bought for in the future

• Lease payment - monthly lease

payment the tenant makes on house

until he exercises the option

• Term - duration of lease

Example (2017 16x76 3/2): $4,000 option payment, $450/mo. lease

payment, option price of $5,000 at the

end of a 10 year lease (option payment

does not apply against option price)


L-O “financing”

Two separate transactions

Community

Owner / LLC Home Buyer Acquisition

Lender

Option payment

Monthly lease pmt.

Lease term

Option price

6-7%+/yr.

75%+ of total

10 yr. amortizing


Example (2017 16x76 3/2): $4,000 option payment, $450/mo. lease payment,

option price of $5,000 at the end of a 10 year lease

(option payment does not apply against option

price)

MH Acquisition Financing

$29,943 MH

$ 8,000 onsite costs

$37,943 total cost

$ 9,486 CO downpayment (25%)

$28,457 loan, 7%/yr., 10 yr., $330/mo. Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 49

Lease-Option Questions

• What is status of resident during

lease term? Buyer, borrower?

• What is the status of the CO during

the lease term? Seller, lender?

• Is the option payment a security

deposit?

• What interest rate is associated with

the L-O?

• Can option payment be too low or

too high?



• What determines the option price?

• What determines the lease payment?

• What portion of the lease pmt. can

apply toward purchase of the MH?

• What condition does RTO violate?

So what?

• How is Lease-Purchase different

from L-O? So what?

• Why OK for MH but not for site-built



• Can CO ask finance questions?

• Could CO finance option price?

• What is a “disguised credit”

transaction? So what?



Qualifications (limitations)

NOT Attorney



Legal basis for

Lease-Option

Community Owners Can Not • Originate mortgage

• Service mortgage


S.A.F.E. Act of 2008 Secure and Fair Enforcement for

Mortgage Licensing Act




S.A.F.E. Act

Without SAFE Act

licenses, etc.! MLO & MB

Generally

Credit sale of a dwelling

Security interest

State banking laws


Mortgage?

• Promissory note, interest

rate, amortization schedule


Credit sale?

Generally

Credit sale of a dwelling

Security interest

State banking laws


Mortgage



Community Owners Can

• Take application for lot or MH rent

• Pull credit report

• Verify income

• Confirm employment

• Check rental history

• Compute DTIs Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 60

• House only

• Option payment

• Lease payment

• Lease term

• Option price


Lease with Option to

Purchase (L-O)

Lease-Option • Not rent-to-own (RTO) or L-P

• ~5-10% “down” (option pmt.)

• True lease (~rental pmt., no

equity)

• Option price (FMV, no obligation)

• If CO finances option price …


Lease-Option • Not rent-to-own (RTO) or L-P

• ~5-10% “down” (option pmt.)

• True lease (~rental pmt., no

equity)

• Option price (FMV, no obligation)

• If CO finances option price –

surrender title, unsecured

promissory note


Other SAFE Act Requirements • Regulation M



Regulation M

Other SAFE Act Requirements • Regulation M

• Fair credit

• Equal credit

• Civil rights

• Fair housing

• Money laundering

• Identify theft

• HOEPA (predatory lending)

• Etc. etc. Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 66

Universal L-O Contract • Mortgage/Banking law

• Attorney preferences

• State-Specific lease

issues


State-Specific Issues • Maintenance/Repair

• Insurance

• Property tax

• Sales/Use tax

If LL responsible, reflect

in lease payment


Maintenance Costs 16x76 3/2, $40,000 sales price www.thebalance.com

$400/yr. (1% rule)

$1,216/yr. ($1/SF rule)

Considerations: Age (5-10, 10-20, 20+)

Weather

Condition

http://www.sunlandhi.com/documents/co

mponentlife.htm#componentcosts


http://www.thebalance.com/

http://www.sunlandhi.com/documents/componentlife.htm#componentcosts





• What is status of resident during

lease term? Buyer, borrower?

• What is the status of the CO during

the lease term? Seller, lender?

• Is the option payment a security

deposit?

• What interest rate is associated with

the L-O?

• Can option payment be too low or

too high? Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 70


• What determines the option price?

• What determines the lease payment?

• What portion of the lease pmt. can

apply toward purchase of the MH?

• What condition does RTO violate?

So what?

• How is Lease-Purchase different

from L-O? So what?

• Why OK for MH but not for site-built?



• Can CO ask finance questions?

• Could CO finance option price?

• What is a “disguised credit”

transaction? So what?


Elements of L-O

• Option payment (reasonable)

• True lease (FMV, state specific,

option to cancel, no equity)

• Option price (FMV)

• Surrender title if finance option

price

• Docs prepared by IAMHA attorneys

• KISS




Lease-Option

Structure

Financial Calculations • HP-12C

• Original

• Phone app

• www.fncalculator.com

• TVM Calculator

• iPhone app • “ez financial calculators”

• TVM Calculator

• Excel


http://www.fncalculator.com/


Financial Calculations • Term (months)

• Interest rate (annual)

• Present Value (amt. financed)

• Payment (monthly)

• Future Value (remaining balance)

L-O Sample Transaction #1

77

Cost of HomeHome-only Cost

Base Price $25,250

Options, surcharge, dues, fees, misc. $3,443

Freight $1,250

Total Home-Only Cost (mfg. invoice) $29,943

On-Site Costs

Setup - permit, block, level, tie-down, remove hitch $1,950

Electrical hookup - permit, wire, labor $350

Water hookup - permit, material, labor $200

Sewer hookup - material, labor $150

Decks - front & back, material, labor

Front - 8x10 $900

Rear deck - 4x6 $500

A/C $1,800

Skirting $1,000

Landscaping $423

Miscellaneous, contingencies (10% of on-site costs) $727

Subtotal - On-Site Costs $8,000

Overhead Costs

Carrying cost to sell (interest, tax, & insurance, 6 mos.) $0

Months to sell 0 mos.

Sales commission $0

Subtotal - Overhead Costs $0

Total Cost of Home, Options, On-site Costs, & Overhead $37,943



Acquisition FinancingLoan-to-Value (LTV) 75.0%

Portion of Cost Paid by Community Owner $9,486

Portion of Cost Financed by Acquisition Lender

Amount $28,457

Cost of funds (fixed for 3-5 yrs.) 7.0% /yr.

Term 10.0 yrs.

Total Monthly Payment $330


Selling the HomeSales Price of Home

Gross profit $2,000

Sales Price $39,943

Lease-Option Terms of Sale

Option Payment (downpayment) $4,000

Amount "financed" $35,943

Default allowance 3.0% /yr.

Term 11 yrs.

Lease period 10 yrs.

Monthly L-O pmt. (est. cost of funds + 3.0%) + state-specific

items (eg - sales/use tax, maintenance, insurance, tax, etc.$450

When Option Is Excercised Buy Home (after 10 yr. lease)

Option payment applies against option price No

Option price $5,000

Balance owed $5,000

Financing term (year) 1 yr.

Interest rate 0.0% /yr.

Monthly payment $417


Financial Calculations • HP-12C

• Original

• Phone app

• www.fncalculator.com

• TVM Calculator

• iPhone app • “ez financial calculators”

• TVM Calculator

• Excel


http://www.fncalculator.com/


EZ Calculator Acquisition Financing


EZ Calculator L-O Lease Payment


EZ Calculator L-O Option Price

Option Price Support • $39,943 sales price

• $5,000 option price, FMV, 10 yr.

• $3,500/yr. depreciation

• 8+%/yr. depreciation

• NADA wholesale, relocated


L-O “financing”

Two separate transactions

Community

Owner / LLC Home Buyer Acquisition

Lender

Option payment

Monthly lease pmt.

Lease term

Option price

6-7%+/yr.

75%+ of total

10 yr. amortizing


86

L-O Sample Transaction #2 Cost of HomeHome-only Cost

Base Price $15,000

Options, surcharge, dues, fees, misc. $0

Freight $0

Total Home-Only Cost (mfg. invoice) $15,000

On-Site Costs

Setup - permit, block, level, tie-down, remove hitch $0

Electrical hookup - permit, wire, labor $0

Water hookup - permit, material, labor $0

Sewer hookup - material, labor $0

Decks - front & back, material, labor

Front - 8x10 $0

Rear deck - 4x6 $0

A/C $0

Skirting $0

Landscaping $0

Miscellaneous, contingencies (10% of on-site costs) $0

Subtotal - On-Site Costs $0

Overhead Costs

Carrying cost to sell (interest, tax, & insurance, 6 mos.) $0

Months to sell 0 mos.

Sales commission $0

Subtotal - Overhead Costs $0

Total Cost of Home, Options, On-site Costs, & Overhead $15,000



Acquisition FinancingLoan-to-Value (LTV) 0.0%

Portion of Cost Paid by Community Owner $15,000

Portion of Cost Financed by Acquisition Lender

Amount $0

Cost of funds (fixed for 3-5 yrs.) 7.0% /yr.

Term 10.0 yrs.

Total Monthly Payment $0


L-O Sample Transaction #2 Selling the HomeSales Price of Home

Gross profit $0

Sales Price $15,000

Lease-Option Terms of Sale

Option Payment (downpayment) $2,500

Amount "financed" $12,500

Default allowance 3.0% /yr.

Term 5 yrs.

Lease period 4 yrs.

Monthly L-O pmt. (est. cost of funds + 3.0%) + state-specific

items (eg - sales/use tax, maintenance, insurance, tax, etc.$266

When Option Is Excercised Buy Home (after 4 yr. lease)

Option payment applies against option price No

Option price $3,000

Balance owed $3,000

Financing term (year) 1 yr.

Interest rate 0.0% /yr.

Monthly payment $250

Home Acquisition Financing • Private investors, SD IRA

• GENCapital

• MH mfgs. – Fleetwood, Legacy

• 21st Mortgage

• Broadfield Finance

• HAS Financial

• American Commerce Bank


Retail Financing (consumer) Conventional mortgage

L-O Conventional • Common Sense Lending

• Triad Financial

• 21st Mortgage




L-O Defaults


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0-1 Yrs. 1-2 Yrs. 2-3 Yrs. 3-4 Yrs. 4-5 Yrs. 5-6 Yrs. 6-7 Yrs.

De

fau

lt R

ate

Years from loan origination

Pentgon Properties, Inc. Seller-Finance Default Rate

6/92-6/97 (61% in 4 yrs.)


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%


De

fau

lt R

ate



6/92-6/97 (61%) 2/05-2/10 (52%)


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%


De

fau

lt R

ate



6/92-6/97 (61%) 2/05-2/10 (52%) 2/10-8/15 (31%)


0%

10%

20%

30%

40%

50%

60%

PPI Repo Rates Repos / Contracts Outstanding


Default Rates

New vs. Used MHs


Repo vs. New Homes Sold 2010-2016Sales

transactions Defaults Total

Total 136 33 24.3%

Repos 79 30 38.0%

New homes 57 3 5.3%


Our 20+ years of experience

selling repos & NEW CSH Homes

New homes are:

• Easier, quicker to sell

• Upscale residents

• Satisfied buyers

• Fewer defaults

• Lower cost defaults

• Upgrade communities


Default Rates

New SW vs. New DW


New SW vs. New DW Homes Sold 2010-2016Sales


Total 57 3 5.3%

SW homes 51 3 5.9%

DW homes 6 0 0.0%


Why?

New vs. Repo MHs

What else?

Break time?



Pre-Qualification

Worksheet


Standardize procedures

Avoid rush to judgement

• Too little income

• Too low downpayment

• Too bad credit

Avoid wasting time building

relationship, taking app &

showing homes


Pre-Qualification Worksheet Eliminate unqualified prospects

• Renter

• Insufficient income

• Insufficient downpmt.

• $250 raise > $500 truck pmt.

• 825 credit score (combined!)

• Drug dealer, prostitute, domestic

problems

Pre-Qualification Worksheet • Landlord reference

• Current monthly rent

• How long renting

• Criminal history

• Credit report

• Downpayment available

• Debts/Obligations

• Income/Employment history


Lease-Option Ability To Repay

Back-end ratio Housing costs + Other debt Gross income

Front-end ratio Housing costs Gross income

(40% max)

(30% max)



• $2,700/mo. gross income • 300/mo. child support • $3,000/mo. total gross income

• $300/mo. lot rent • $500/mo. L-O pmt. • $800/mo. housing cost

• $800/$3,000 = 27% Front-end DTI



• $3,000/mo. total gross income

• $800/mo. housing cost ($300 + $500) • $350/mo. child support • $1,150/mo. total debt

• $1,150/$3,000 = 38% Back-end DTI



• $3,000/mo. total gross income

• $800/mo. housing cost ($300 + $500) • $400/mo. truck pmt. • $350/mo. child support • $1,550/mo. total debt

• $1,550/$3,000 = 52% Back-end DTI



Consumer Finance Protection Bureau (CFPB)

Ability To Repay (ATR) Debt-to-Income Ratios

Front end (30%) Back end (40%)


Repos - 2006-2011 vs. 2011-2016 (pre & post PQW) (8/1/06-7/31/11, 8/1/11-7/31/16) (1)

Sales


Total 153 57 39.1%

2006-2011 108 46 42.6%

2011-2016 45 11 24.4%

(1) only counted defaults among repo/used homes since we only developed the

PQW w/ the sale of New homes, ie no New homes sold pre-PQW


Article reprints



Lease-Option

Myths


L-O Myths • Same as rentals



• Intent of parties critical




• Buyer will object – complex




• Buyer will object – complex • Downpmt., mo. pmt., term

• Rental homeowner






• My mkt. can’t afford






• My mkt. can’t afford • Sales price is irrelevant

• Build & they will come



FAQ


Frequently Asked Questions • New vs. Used

• What buyer interest rate?

• One lease fits all?

• Not subj. to other regs.?

• Cost of homes?

• How much MH sales profit?

• Length of L-O term?

• DWs vs. SWs?



L-O MHs in LLCs

• Background

• History of seller-financing

• Why seller-finance today

• Legal basis for L-O

• Transaction structure

• Defaults

• Pre-Qualification Worksheet

• Myths

• FAQ

Who Benefits From L-O Sales • Community owner

• Home buyer

• MH manufacturer

• Lender

• State MHA

• MH industry (movers, setup,

supplies, etc.)


Regulation likely? • Abuse

• Predatory

• Disregard docs/procedures

• Non-compliance

• “Creativity”



www.LeaseOptionMHSales.com



Questions? www.LeaseOptionMHSales.com


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