Lease or Buy?

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Introduction

This section presents information to help PSVE residents compare the financial alternatives open to them if the park is converted to condominium ownership.  Obviously, owners will have additional non-financial considerations to influence their decision.

At this writing, we have no way of knowing the prices or terms of the spaces to be offered.  Also, an  interesting question is: What will I be buying?

The use of the term "mobilehome lot", or "manufactured home lot," is somewhat misleading when used in mobilehome park conversions to condominium ownership.  Buyers do not receive title to a "lot" per se, they acquire a fee-simple interest in a parking "space" for their manufactured home that is specifically defined for their exclusive use.

Thus, ownership consists of the right to use the surface of a defined portion of land.  It does not include the land itself as is usually the case in fee simple residential ownership. For this reason, wherever the term "lot" is used it actually means "manufactured home, or mobilehome, space." 

Management and operation of the park

As a tenant-in-common, all buyers will also acquire an undivided interest in and the associated responsibilities for the park common area.  Common area includes the entire park, except the manufactured home spaces, including those that have been purchased by residents and those that are still owned by the park owner.

This form of ownership has a number of implications that park residents must consider when evaluating the pros and cons of purchasing.

The space owner’s fractional ownership of the common area carries the responsibility for park operation, maintenance, repairs and any improvements.  This is accomplished via a Homeowners’ Association (HOA).  The common area includes the park infrastructure, such as streets, grounds, pools, clubhouse and private utility systems, everything except the spaces, but including the land and utility systems under the spaces. 

After a majority (51%) of the spaces have been sold, the common area will be financed, operated and managed by the Homeowners’ Association (HOA), with each space owner (association member) having one voting right.  (According to the proposed draft CC&R’s, the spaces owned by the park owner will have three votes each.)  Until a majority of homeowners is reached, the park owner will continue to control the management of the park.

Financial reserves for operation and maintenance of the common areas will be funded by the park subdivider (owner) prior to approval of the project.  The monthly HOA fees and reserve amounts will be established by the State Department of Real Estate based on estimated current and future requirements.

Implications of HOA membership

If reserves are insufficient to cover any extraordinary expenses, special assessments will be made on the members of the HOA to cover the costs.  All members are included, whether they are low-income or non-low-income purchasers.

It should be noted the PSVE park includes streets and private utility systems that have been in service without major improvement for nearly forty years.

What about homeowners that continue to rent their spaces?

Park residents that do not purchase and continue to rent their spaces will not be required to participate in the funding of the HOA.  The park owner-investors will continue to own the rented spaces and will have to pay the monthly HOA fees and cover the cost of any special assessments.  The only way they can recover these costs is from the space rental amounts they receive.

The current state conversion codes limit increases for renters with low-income status for as long as they own their coach.  When the coach changes hands, rent control is eliminated.

For non-low-income renters, after a four-year market rate adjustment period, rents are no longer controlled so they could then be increased to any level.  All rental income goes to the space owners, none to the HOA.

This means that the cost of operating and maintaining the park, including any special assessments for extraordinary repairs, will be borne exclusively by HOA members.

For the non-low-income homeowners that continue to rent, the park owner-investor HOA members will have the ability to increase rents on the lots they still own to whatever level they wish after the 4-year adjustment period.  It will be very important at the outset, therefore, for those homeowners to negotiate acceptable lease terms that will run beyond the 4-year period. 

Will the park owner-investors negotiate acceptable lease terms?

The conversion code overrules local rent control for low-income homeowners with state mandated provisions that are eliminated when the coach changes ownership.  The law eliminates rent control for the low-income renters over time.  Considering the age of most homeowners and the mobility rate of Californians in general, the time could be rather short.

After the 4-year adjustment period to market rents, government rent control for non-low-income homeowners is completely eliminated, leaving any rent increase protection up to the homeowner's ability to negotiate acceptable terms.

Since the legislative activity on park owner-initiated conversions in recent years has tried to focus on preventing so-called "sham" conversions by park owners to eliminate local rent control, the park owner-investors are somewhat legally obligated to show some measure of good faith by agreeing to acceptable lease terms.  Onerous lease terms could be a clear indication of a "sham" conversion and expose them to court action.  Also, the condition of the park could deteriorate, with vacant lots and abandoned coaches.  This would have a negative effect on the value of mobile homes and lots in the competitive marketplace.

Comparing options for all residents

When deciding whether to purchase or continue renting, it will be important to compare what the actual costs and benefits would be for each option.  Refer to input criteria following charts.

From an investment viewpoint, it will be important to compare the following:

Mobile home net sale prices

In studying the mobile home market, a very important pricing phenomenon is apparent.

In a park that has been converted to space ownership, such as El Dorado, the sale of a mobile home where the resident has opted to continue leasing after the conversion requires that the lot be purchased by the buyer at the time of a sale.  Since, the park owners are free to price spaces at whatever amount they wish, the proceeds of the sale received by the owner of the mobile home will be whatever is left over after the lot price is paid.

The total purchase price will be dictated by the competitive market for like mobile homes and spaces in comparable parks.

For example, if a buyer is willing to pay $180,000 for a mobile home and space, and the space price is fixed at $140,000, then the amount received by the resident for the mobile home will be $40,000.  If the space is priced at $100,000, the mobile home owner will receive $80,000.

This market principle is clearly illustrated in the sales of mobile homes in the El Dorado park.  For current sales, see Market Data.