Recently I signed a contract to buy a 21 space MHP. All units are rented out and the part of the town is growing. All city utilities. During due diligence, we found that the county only give 18 space permit. So 3 spaces have been added by current owner.
My question is two folds:
The current owner operated in 21 spaces without a problem for 2 years. Will I be able to operate the same way? How likely the county will come out and ask us to stop operating the 3 illegal spaces?
Obviously, I will try to talk to current owner to lower the contract price but if the current owner insists on the same price, and we remove 3 spaces(willingly or forced by the county), the real cap rate is 9.7. Is this still a good deal?
The first step is to go to the county and ask about the spaces. You do not proceed without the answers now that you are under contract. You will need to put the contract on hold till you get a ruling from the county and that may take a considerable amount of time.
As the current owner told me that the park only has 18 spaces permit. With the 3 extra, the county did not give permit. So as your suggestion, should I ask county if we can get 3 extra spaces permit or something else? Any insights here will be appreciated!
just got answer back from the county that the park had permit for 16 spaces. So 5 has been added later on by the owner.
I am trying to approach the current seller to pay 16 spaces on unit price that we agree on (total price divided by 21 units). And the 5 added units close to cost. (how much the current owner invested in these units).
It is really up to you as to how you want to proceed.
I would make an offer based only on the 16 registered sites and explain that since the other 5 are not registered and could be taken away they are not worth anything and will cost money to be removed if required.
From my perspective I never make an offer on anything that I am not prepared to walk away from. I would determine what I would pay based on the 16 permitted lots and leverage the situation attempting to get my price or walk. My offer would include something for the 5 lots but not very much.
He can agree to my offer or he may choose to reject it and try to get the sites registered before relisting.
I used financial modeling (I am a finance manager by trade ) to evaluate the 5 sites. I calculate the NPV of the NOI for each year over the next 15 years. Then I designed 5 scenarios(arbitrary for easy of calculation, it could be 15 scenarios) that the 5 sites will operate without issue from the county (they were operating like that for the past few years without issue). and then I weighted average the NPV based on the probability.
Again, thank you so much for your suggestion. I really appreciate it!
) to evaluate the 5 sites. I calculate the NPV of the NOI for each year over the next 15 years. Then I designed 5 scenarios(arbitrary for easy of calculation, it could be 15 scenarios) that the 5 sites will operate without issue from the county (they were operating like that for the past few years without issue). and then I weighted average the NPV based on the probability.