How Infilling Adds Value to Manufactured Home Communities
By Amanda Cruise
You know I love value-add manufactured home communities. And you probably know there are different ways to “add value” to communities. Some are easier including bringing rents to market. Some take a ton more effort such as infilling vacant lots. Today I’ll dive into the infilling piece including what it means, how it’s done, and how it should play into a value-add strategy.
What is infilling?
If you have a vacant lot in a community, then you put a home on that lot and get a resident paying money to occupy the space, you have infilled that lot. The new resident can be renting the home as a park-owned home or the resident can purchase the home and pay lot rent. Either way, the lot was making $0 per month and had very little value. Now it’s making money each month and is worth $45,000 or more depending on the market.
How does infilling work?
Infilling can be done either with pre-owned homes or with new homes. We do infill some with pre-owned homes because it’s quicker to find pre-owned homes than to have a new home built from a manufacturer. When we infill with pre-owned homes, we usually find them on Facebook Marketplace. I prefer new homes though. Why? Because they look great in the community. And the costs to get them set up are very predictable, roughly $20,000 for the total setup.
Once we identify a home, either new or used, we arrange to have the home brought into the community where it’s placed on a vacant lot. A setup contractor will block the house (put it on cinder blocks) and tie it to the ground. Then water, sewer, and electrical utilities are hooked up by each of those specialized contractors. Finally skirting and decks are installed and any interior repairs are handled. Then the home is marketed for sale or for rent. Along the way there are various check points for inspections by the local municipality to ensure everything is set up correctly and is safe.
“Free” Value-Add?
The goal with infilling is to eventually sell the home to return all of the capital used to infill the lot, thus resulting in an occupied lot worth $45,000+ with $0 net out of pocket. It hardly ever works out to $0 net, especially with used homes where you can’t sell them for nearly as much but you still incur the same setup costs + home move cost. Once all is said and done and the home is sold to a resident, even if the net loss is $10,000 to get that home setup and sold, that lot is worth $45,000+, so it’s still a valuation win.
Infilling does tend to be capital intensive because the money to purchase these homes and set them up needs to earmarked and raised up front while it may take several months or even years to have all infilled homes operational.
How should infilling play into a broader value-add strategy?
We like infilling in the right areas. We’ve learned the (very hard) way that infilling into mediocre areas is incredibly challenging. Infilling into great locations is much easier. We usually underwrite a few infills per year in each new community and raise money accordingly.
That money can be recycled. For example, if we raise for 3 infills to a community, we will order 3 new homes and get those setup. Then we try to sell them off. If they don’t sell, we rent them and offer the occupants the ability to buy later. It can be a long process. But when the homes are eventually sold off, that initial setup cost (or the majority of it) is recouped and that money can be earmarked for another new home.
Infilling a few lots in our business plan is something we do if it makes sense for the community. Underwriting a heavy infill plan of say 10+ spaces isn’t something we usually count on in our underwriting. There are several variables at play, so we like infilling to be a bonus, not something required for the asset and business plan to make sense.
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