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TRANSCRIPT
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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
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Lease-Option
Spencer Roane
Pentagon Properties, Inc. Atlanta, Ga.
“Financing” of
MHs in Iowa
Thank you Iowa MHA!
LLCs
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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
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 5
Background, qualifications,
limitations
Representative experience?
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 6
Qualifications (limitations)
NOT Attorney
Accountant
Expert
Consultant
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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
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5/22/91 Stk. 101 – ’91 Peach State 24x54 3/2 $15,110 mfg. invoice , $22,133 total cost,
$24,839 sales price
8
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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
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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
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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)
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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!
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Photos of Pentagon
Properties, Inc. residents
who paid off L-O
contracts and received
titles
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 15
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 16
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 17
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 18
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 19
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 20
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 21
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 22
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 23
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 24
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 25
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 26
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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
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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.
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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)
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 30
New MH Iowa Sales Potential
~3,000 vacant sites
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
History of seller-
financing
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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
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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.
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
Why seller-
finance?
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
Why seller-
finance?
Fill vacant lots!
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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
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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
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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
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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
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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
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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
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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
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 44
New MHs Purchased by COs
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
Legal basis for
Lease-Option
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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
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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
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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
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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
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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
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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
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 53
Qualifications (limitations)
NOT Attorney
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
Legal basis for
Lease-Option
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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
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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
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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?
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• Promissory note, interest
rate, amortization schedule
Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 58
Credit sale?
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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
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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
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• 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)
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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
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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
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Other SAFE Act Requirements • Regulation M
Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 64
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 65
Regulation M
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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
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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
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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
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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
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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
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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
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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
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
Lease-Option
Structure
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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
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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)
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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
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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
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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
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 81
EZ Calculator Acquisition Financing
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 82
EZ Calculator L-O Lease Payment
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 83
EZ Calculator L-O Option Price
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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
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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
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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
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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
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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
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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
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 91
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
L-O Defaults
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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.)
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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%)
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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%)
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 97
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 98
Default Rates
New vs. Used MHs
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 99
Default Rates
New vs. Used MHs
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 100
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 101
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 102
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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%
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 104
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 106
Default Rates
New SW vs. New DW
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 107
Default Rates
New SW vs. New DW
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 108
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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%
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 110
Why?
New vs. Repo MHs
What else?
Break time?
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
Pre-Qualification
Worksheet
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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
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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
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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
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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
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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
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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
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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
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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
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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%)
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 121
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 123
Article reprints
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
Lease-Option
Myths
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 125
L-O Myths • Same as rentals
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 126
L-O Myths • Same as rentals
• Intent of parties critical
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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
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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
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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
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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
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
FAQ
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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?
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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
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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
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Regulation likely? • Abuse
• Predatory
• Disregard docs/procedures
• Non-compliance
• “Creativity”
Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 135
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 136
www.LeaseOptionMHSales.com
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales © Pentagon Properties, Inc. 2016 137
www.SECOConference.com
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Iowa MHA 2016 Annual Meeting, Lease-Option MH Sales
© Pentagon Properties, Inc. 2016
Questions? www.LeaseOptionMHSales.com
www.SECOConference.com