I have known Lonnie Scruggs for many years. I first met Lonnie at a seminar in Florida. Lonnie was invited to come up to the stage to explain to the audience what he did. “Just what do you do Lonnie” asked the session’s leader. “Well, I fool around with used mobile homes” said Lonnie putting on his country boy persona. “How ya doing with em” asks the leader. “About $10,000″ said Lonnie. “Lets hear it for Lonnie he’s making $10,000 a year with Mobil homes” said the leader starting to clap his hands. The crowd took up the beat. “Wait, wait” said Lonnie pulling on the man’s sleeve. “What’s the matter?” asks the session’s leader. “It ain’t $10,000 a year” said Lonnie, “Its $10,000 a month!”
I would see Lonnie at various meetings with his Lovely wife. I realized very early that he was not a country bumpkin, but a very shrewd entrepreneur. He has just written a new book called “Taking the Mystery Out of Money”. This book is a must read for anyone reading the NoteWorthy newsletter. Lonnie provided me with a copy of his book in a swap for my “Sallee-Bop-TB” book. He wrote on the flyleaf that he was sure I already knew everything in his book. Wrong! I got at least three new ideas that I intend to put into action starting now.
Lonnie has a reputation in his area as a used mobile home dealer. He gets offers to buy mobile homes from individuals as well as banks and mobile home finance companies. After reading his first book “Deals on Wheels”, I started developing an interest in mobile homes by running a small adv. in the mobile homes for sale section of the classifieds in my local newspaper. It looks like this:
WE FINANCE OLD MOBILE HOMES.
Maximum loan $9,000.
Call for information
940-322-5291
Usually the caller is the buyer. “I saw your adv in the paper”; what’s your interest rate?” “Tell me about what you are trying to do”, I ask. “Well the home is a …” here follows a description of the mobile home. “Where is it”, I ask. If it is in a mobile home park I am interested. I do not make loans on homes on private property unless I can get a lien on the land. This avoids having to move the home if there is a default. If the home is in a park, my note has a clause that the home can not be moved without paying off the note. Usually, since I will leave the home where it is in case of default, I can sometimes get the park to grant me a few months free rent. As you note from the adv, my maximum loan is $9,000. This price home is easy to sell if there is ready financing available. Homes above $10,000 represent more risk in my opinion. If I keep the loans small, I can spread my money around since diversification reduces risk.
“What kind of a payment can you make”? Two hundred to Three Hundred Fifty is the usual range. “How much money have you set aside to buy this home”? Five Hundred dollars is my minimum down payment. Wherever possible I require an escrow for Taxes. There has to be a policy on the home at closing. I use a title clerk at one of the local mobile home dealers to do the paperwork. She gets a fee of $100.00. Here is a typical deal:
Purchase price $9,000
Down Payment $ 750
Note for $8,250
Lonnie taught me that 12.75% is a good rate because it doesn’t sound like a “teen” rate like 13% would. So I start with that. Get your calculator out and do the math with me. The buyer’s level of comfort is $275.00 per month.
|
N |
I |
PV |
PMT |
FV |
|
? |
12.75 |
(8,250.00) |
275.00 |
0.00 |
|
37 |
12.75 |
(8,376.94) |
275.00 |
0.00 |
|
37 |
13.79 |
(8,250.00) |
275.00 |
0.00 |
The HP12c always rounds up the payment to the next higher number if there is a small residual payment. When I push 37 months again you will see that the loan could be as much as $8,376.94. Well that’s a red flag, so I just change the interest rate to 13.79%. Lonnie says that most buyer don’t care, they will buy if the deal can be budgeted within their level of comfort. In this case $275 per month with a $750.00 down payment.
So far so good, but I want a better yield then 13.79%. In his book Lonnie discusses the difference between yield and discount. If I could discount the note say 5%, then I could increase my yield. Let’s see how much.
|
N |
I |
PV |
PMT |
FV |
|
37 |
17.35 |
(7,837.50) |
275.00 |
0.00 |
*$8,250 – 5% (412.50) = $7,837.50
Where does the $412.50 come from? From the Seller. I get the name and phone number of the seller and permission from the buyer to contact him/her. “Mr. Seller, this is Henry Dvorken with Courtman Mortgage. We are trying to arrange financing for Mr. Buyer on the mobile home he wants to purchase from you. While things have not been finalized, we are very close. The loan committee has told me to charge 5% of the loan in points. That $412.50. If you would pay that amount at closing in order to get cash for your home, I think we are very close to making things work.” That works out to $8,587.50 cash less your share of the paper work to transfer title. Is your home “free and clear”? If not, you will have to pay off any liens on the property for back taxes and any unpaid payments.
Almost always they will agree to pay the points. Sometimes they just refuse, if so I ask the buyer if he will add the points to his loan. In this case if I added $412.50 to the loan, and there were 40 payments, the yield would be 17.82%. Try this for yourself.
Great you say, but who has $8250.00. I only have $3.000.00 available. Let’s say you can get $5,000 from a local investor. Let’s say you offered a local investor 9%.
|
N |
I |
PV |
PMT |
FV |
|
21 |
9.00% |
$5,000.00 |
$250.00 |
$186.36 |
Notice the investor would get $250.00 for 21 months and you would keep $25.00. The 22 payment would only be $186.36, so you keep $88.64.
What is the present value of these cash flows at a 17.35% return?
|
N |
I |
PV |
PMT |
FV |
|
21 |
17.35% |
? |
$25.00 |
$88.64 |
|
|
|
$515.58 |
|
What is the present value of the 15 future cash flows? First calculate the value as if they started now
|
N |
I |
PV |
PMT |
FV |
|
15 |
17.35% |
? |
$275.00 |
|
|
$3,684.56 |
Since they really don’t start for 22 months, let’s calculate the real present value
| N | I | PV | PMT | FV |
| 22 | 17.35% | $2,463.90 | 0 | $3,684.56 |
So let’s summarize. You got $412.50 in cash at closing from the points. Then you got $25 per month for 21 months, and the one payment of $88.64. Then 15 payments Of $275.00 for a total cash flow of $5,151.14. (Present value of the cash flows $3,391.94) YOUR INVESTMENT IN THE DEAL WAS $2,837.50.
Lonnie is correct, it is better to create notes then trying to find them in the court house. Buy this book and follow the instructions and with hard work you can be as successful as my friend Lonnie Scruggs.