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  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    To Download

    www.SECOConference.com

    | Archives | Iowa L-O

    PowerPoint presentation

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 5

    Background, qualifications,

    limitations

    Representative experience?

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 6

    Qualifications (limitations)

    NOT Attorney

    Accountant

    Expert

    Consultant

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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 7

  • 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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 9

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 10

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

    $4,376 purchase price

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 11

    Stk. 102 L-O Amendment

    Amended: 12/22/03

    2007 exercise date (15-yr. term)

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 12

    Qualifications (credentials?)

    32 yrs., mistakes, some learning

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 14

    Our homes

    New

    Spec

    Options, features (CSH)

    Decks

    Skirting

    A/C

    Landscaping

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 15

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 16

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 17

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 18

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 19

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 20

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 21

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 22

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 23

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 24

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 25

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 26

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 27

    Qualifications (credentials?)

    32 yrs., mistakes, some learning

    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 MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    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.

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 29

    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)

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 30

    New MH Iowa Sales Potential

    ~3,000 vacant sites

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    History of seller-

    financing

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 32

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 33

    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.

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    Why seller-

    finance?

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    Why seller-

    finance?

    Fill vacant lots!

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 36

    Filling vacant sites in

    our communities • Increase cash flow

    • Increase value

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 37

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 38

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 39

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 40

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 41

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 42

    Filling vacant sites in

    our communities • Increase cash flow

    • Increase value

    • Reduce common area costs

    • Upgrade appearance

    • Upgrade clientele

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 43

    PLUS …

    MH manufacturers want

    our business CSH homes

    Options/Features

    Changing procedures - sales,

    delivery, service, warranty

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 44

    New MHs Purchased by COs

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    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)

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 47

  • 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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 48

  • 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?

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 50

  • Lease-Option Questions

    • 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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 51

  • Lease-Option Questions

    • Can CO ask finance questions?

    • Could CO finance option price?

    • What is a “disguised credit”

    transaction? So what?

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 52

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 53

    Qualifications (limitations)

    NOT Attorney

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    Legal basis for

    Lease-Option

  • Community Owners Can Not • Originate mortgage

    • Service mortgage

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 55

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

    Mortgage Licensing Act

  • Community Owners Can Not • Originate mortgage

    • Service mortgage

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 56

    S.A.F.E. Act

    Without SAFE Act

    licenses, etc.! MLO & MB

  • Generally

    Credit sale of a dwelling

    Security interest

    State banking laws

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 57

    Mortgage?

  • • Promissory note, interest

    rate, amortization schedule

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 58

    Credit sale?

  • Generally

    Credit sale of a dwelling

    Security interest

    State banking laws

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 59

    Mortgage

  • Community Owners Can Not • Originate mortgage

    • Service 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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 61

    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 …

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 62

  • 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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 63

  • Other SAFE Act Requirements • Regulation M

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 64

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 65

    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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 67

  • State-Specific Issues • Maintenance/Repair

    • Insurance

    • Property tax

    • Sales/Use tax

    If LL responsible, reflect

    in lease payment

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 68

  • 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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 69

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

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

  • Lease-Option Questions

    • 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?

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 71

  • Lease-Option Questions

    • Can CO ask finance questions?

    • Could CO finance option price?

    • What is a “disguised credit”

    transaction? So what?

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 72

  • 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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 73

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    Lease-Option

    Structure

  • Financial Calculations • HP-12C

    • Original

    • Phone app

    • www.fncalculator.com

    • TVM Calculator

    • iPhone app • “ez financial calculators”

    • TVM Calculator

    • Excel

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 75

    http://www.fncalculator.com/

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 76

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 78

    L-O Sample Transaction #1

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 79

    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

    L-O Sample Transaction #1

  • Financial Calculations • HP-12C

    • Original

    • Phone app

    • www.fncalculator.com

    • TVM Calculator

    • iPhone app • “ez financial calculators”

    • TVM Calculator

    • Excel

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 80

    http://www.fncalculator.com/

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 81

    EZ Calculator Acquisition Financing

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 82

    EZ Calculator L-O Lease Payment

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 83

    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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 84

  • 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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 85

  • 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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 87

    L-O Sample Transaction #2

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 88

    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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 89

  • Retail Financing (consumer) Conventional mortgage

    L-O Conventional • Common Sense Lending

    • Triad Financial

    • 21st Mortgage

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 90

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 91

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    L-O Defaults

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 93

    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.)

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 94

    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%) 2/05-2/10 (52%)

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 95

    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%) 2/05-2/10 (52%) 2/10-8/15 (31%)

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 96

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    PPI Repo Rates Repos / Contracts Outstanding

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 97

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 98

    Default Rates

    New vs. Used MHs

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 99

    Default Rates

    New vs. Used MHs

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 100

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 101

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 102

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 103

    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%

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 104

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 105

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 106

    Default Rates

    New SW vs. New DW

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 107

    Default Rates

    New SW vs. New DW

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 108

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 109

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

    transactions Defaults Total

    Total 57 3 5.3%

    SW homes 51 3 5.9%

    DW homes 6 0 0.0%

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 110

    Why?

    New vs. Repo MHs

    What else?

    Break time?

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    Pre-Qualification

    Worksheet

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 112

    Standardize procedures

    Avoid rush to judgement

    • Too little income

    • Too low downpayment

    • Too bad credit

    Avoid wasting time building

    relationship, taking app &

    showing homes

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 113

    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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 114

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 115

    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)

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 116

  • Lease-Option Ability To Repay

    • $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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 117

  • Lease-Option Ability To Repay

    • $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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 118

  • Lease-Option Ability To Repay

    • $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

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 119

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 120

    Consumer Finance Protection Bureau (CFPB)

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

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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 121

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 122

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

    transactions Defaults Total

    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

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 123

    Article reprints

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    Lease-Option

    Myths

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 125

    L-O Myths • Same as rentals

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 126

    L-O Myths • Same as rentals

    • Intent of parties critical

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 127

    L-O Myths • Same as rentals

    • Intent of parties critical

    • Buyer will object – complex

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 128

    L-O Myths • Same as rentals

    • Intent of parties critical

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

    • Rental homeowner

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 129

    L-O Myths • Same as rentals

    • Intent of parties critical

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

    • Rental homeowner

    • My mkt. can’t afford

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 130

    L-O Myths • Same as rentals

    • Intent of parties critical

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

    • Rental homeowner

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

    • Build & they will come

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    FAQ

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 132

    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?

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    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.)

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 134

  • Regulation likely? • Abuse

    • Predatory

    • Disregard docs/procedures

    • Non-compliance

    • “Creativity”

    Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 135

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 136

    www.LeaseOptionMHSales.com

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 137

    www.SECOConference.com

  • Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales

    © Pentagon Properties, Inc. 2016

    Questions? www.LeaseOptionMHSales.com

    www.SECOConference.com