Advice on a new Acquisition

Hello everyone,

I came across this park that is on city water and city sewer and seems pretty good overall, but the owner has overpriced the property by about 250k over the purchase price I calculated (61X100X70= 427k). All utilities are individually billed to the tenants. There are 61 occupied spaces out of a total of 72 and all of the homes are tenant owned, with no park owned homes. The lot rents are below market value about $50. Taking into account other factors that could affect purchase price, I was wondering if it is reasonable to offer the owner around 500k, still overpaying for the park, but by less, knowing that I could increase rents in 30 days and increase the NOI by 30k. I I also called the city where the park is located and found that they are working to put a new ordinance in place that does not allow mobile homes older than 10 years to move in or out of any parks. In addition, the park is not near a big metro area. So I wasn’t sure if I should even proceed with the offer or move on? I haven’t called the owner back because I’m looking into all these factors before I pitch him my offer with all my reasons behind it. Please let me know if you guys have any advice or thoughts?

Thank you!

That’s a question only you can really answer as you’re the one who has to live with the return. A rent raise is very easy upside so I would personally answer yes to paying an 8-9 CAP if it turns into a 12-13 CAP after I send out some letters and wait 30-60 days. Also, that assumes the park can be leveraged up efficiently as well. Meaning that the lending will play an equal role in that overall decision.

Aside from that, I would encourage you to sit down and construct a conservative profit and loss using each scenario. (Rents at $100 and rents at $150) You’ll find that ballpark expense ratios are just that. Especially when you have rents that low. Once you factor in the fixed costs of running a park and factor in reserves, I don’t see 61 lots at $100 per month holding a 30% expense ratio. That would be hard to do with $150 rents too. You should really only use those ratios when browsing listings for one to look more closely at… take the ten minutes and build a detailed P&L before engaging a seller with an offer though.

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Listen to Charles. The man knows what he is talking about. How good are the demographics of this area if the lot rents are only $100? I wouldn’t be surprised to find houses for sale int he $50k-$60k range, which makes this a bad bad bad area.

I’ll also point out that your math seems off. If you assume a 30% expense ratio (which you should for most parks with direct billed city water/sewer), your valuation should be 61 x 100 x 12 x .7 x 10 = $512k. If you assume a 40% expense ratio (which you probably should since the lot rents are so low, as CHarles points out), your valuation is closer to your number: 61 x 100 x 12 x .6 x 10 = $439k.

Personally I would be scared to do this deal unless I got very comfortable with the demographics and actual market rents (do those other parks include water/sewer in the lot rent?) and comfortabel I could bump them $50/month (which is still awfully low for a place to live).

I would be interested to take a look at this one a bit more in depth if you pass on it. Its going to be highly specific on the area. How any other parks are in the area , how far, whats their occupancy? What are the avg home prices, 2 bedroom rents, are companies moving in , leaving. Those are all good questions. According to best places.net, is it in a metro area at all?