Buying Parks With Homes


#1

I’m having a hard time doing evaluations with parks that have a high % of park owned homes. For instance I was looking at a decent looking park with 50 lots that has 37 park owned homes. The breakdown was 4-60’s 11-70’s 8-80’s 8-90’s and 6 from 2000 and up. All are single wides and in good shape.

The park has an NOI of about $80,000 and the asking price is about 750k. After looking at the rent roll,I see the income from the 32 homes that are occupied exceeds the lot rent by about 10k per month. So if I apply the negative 120k,the park has a cap rate of less than zero. If I do a 30-60,it comes out to about 435K. This property had 50 spaces and 39 were rented.

What I’m having trouble with is the park appears to be worth more than 435k. The broker felt the 37 homes were easily worth about 275k. If we put a value of 6k per home the number would be around 220k. He also stated that the park would assess for around 530k without the homes and the owner would do a 2nd for the worth of the homes. When I look at the expenses,they are very high and part of it is maintainence and repair. This makes me woner if it is accurate to pull income from home rentals from cap calculations but the go ahead and leave the expenses the owner had on the homes in the formula. I understand that you don’t want to pay 10x’s (if 10 cap) the amount taken in on rent,but on the otherhand is it “fair” to deduct 10x’s the expenses he incurs on the park owned homes ?

Am I doing something wrong when I try to evaluate parks that own homes or is it possible that you just have to go with your gut a bit more on these ?


#2

Hello Steve,

This topic has been discussed quite extensively, and recently.

The issue is that park owned homes are a depreciating asset and will not create a permanent revenue stream as the dirt can (at some point they will have to be junked and newer homes moved to replace them). So you need to really separate both businesses and evaluate them independently of each other.

With so many POH’s (74%), you’re going to have a hard time explaining what the park is really worth to the seller unless you break it down in easy to understand figures (although they appear to understand the challenges since they are willing to finance a portion).

Start with what the dirt is worth, because this is the only place you’ll be able to get a bank loan for. You’ll need to provide more information for us to help you, but let’s say that the dirt NOI is around $35K (since the rent homes will bring in a higher portion of the revenues). So the dirt is worth only about $350,000 (again, please keep in mind that I’m guesstimating here at best since I don’t have enough information). So, if you’re lucky, you’ll get an 75% LTV loan on that amount which means you’ll get a $280,000 loan. That’s a long way off from $750K!

Next, evaluate the rentals based on their wholesale value. In other words, what is the house worth in your market. I would never suggest paying on future revenue stream of a rental. You’ve pegged that price at around $6K per, or $220K per lot.

Now you are at $570,000. How does the seller reconcile the other $180,000 premium he is charging for the park?

I know the broker thinks it will asses for $530K, but I have no idea how. Either way, at the end of the day, you have to decide whether you want to overpay for the park or not. That’s only a decision you can make.

I hope this makes sense.


#3

Thanks for the reply Rick. What I was try to say is that this park although it cash flows well,appears to be worth about 430k(60-30) by the methods we use to value parks.

To be a little more inclusive… The park grossed about 185k and had expenses of 95k. About 20k of these expenses were due to repairs and materials for POH’s. The utilities(city water and sewers) were also very high and that needs to be checked out. When I figured all the rentals at the lot rate (dirt income) , I found that I had to minus out about 10k a month or 120k per year. That puts the NOI at a negative 40k…not the 35k that you guessed at.

The above makes me wonder if the 20k expense for POH’s should be set aside and taken off the value you assign to the homes ? Otherwords …it is stupid to pay say a 10 cap on the rental of a home worth maybe 8k and thus bloat it’s value to maybe 35K. But on the otherhand are you being fair to the seller when you muliply the expenses for these mobile homes by the cap rateyou intend to pay ? In this case you took out 120 k of income from the NOI but left the 20k the owner spent maintaining them in the NOI cap calculations. As far as the number for this park,it would still be a 0 cap,but that wouldn’t necessarily be the case with other deals.

Could be that this park is only worth about 435k I guess,but it seems to cash flow pretty well. I guess maybe the problem is what it might look like 5-6 years down the road.

As far as overpaying for the park,I don’t think I would overpay for anything in this economy. I was just wondering if the methods we used for valuation tend to undervalue homes that have a high % of POH’s. I really appreciate your imput and it will help my partner and I come to an agreement on whether or not we should consider this park…at a much lower price.

Thanks,

Steve