When looking to buy a smaller MHP, I keep running into what looks like massive overpricing on the asking price by the sellers. I use the basic formula learned at MHU (lot rent X number of rented spots X 60 or 70). The starting numbers I come up and what the sellers have are usually 50 - 60 % … they ask $600K, I value it at $375K for example.
Should I add any value to existing POHs and lots ready to go, but empty? I find myself not even wanting to make an offer because it seems I may be low-balling . Thanks.
No.
Commercial property value is based solely on the value of the business. It’s extremely common for small operators to give value to the home rent component towards the overall business and try to find a sucker, but it will not appraise with the lender and you would have to cover any difference out of pocket.
Instead you can calculate based on lot rent as you mentioned and then add the value of the homes (for what you could sell them to the tenants) as a one time fee added to the price. Some people would do that to make the deal work, others would not. You still have a similar problem with lots of POH’s that you have to pay for those out of pocket as part of closing the deal, then rehab them prior to selling, etc.
Empty lots are worth zero - technically less than zero since you have to mow them and maintain them.
@tangsoo , as per your question:
- “Should I add any value to existing POHs and lots ready to go, but empty?”
My Husband and I just had this discussion tonight concerning “lots ready to go, but empty”.
My Husband remembers that Dave Reynolds (of Frank and Dave) wrote an article stating that he would give “lots ready to go, but empty” a value of 25% of the Lot Rent.
Personally, I would give them a value of 50% of the Lot Rent. They are potential, additional cash, but the New Owner has to do all the work.
I view “lots ready to go, but empty” as an upside to a deal…similar to undermarket rents.
There is value to the New Owner, but the New Owner has to do the work to get that value.
Now Frank would say that “lots ready to go, but empty” have no value and even cost additional money in upkeep such as mowing and landscape.
We wish you the very best!
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Thank you, I’m waiting for a reply from Frank now, for quick eval. before I make offer. Seller ask $385K, I’m at $273K…
Agree with Kristin. I have a small park for sale with one empty lot. The utilities are there and ready for a new home. So someone can invest, say, $20k to bring in a home, sell it, and, over 7 years or so recoup their cost, at a very attractive interest rate, PLUS earn lot rent from then on. And there’s no value in that? I have to disagree.
When I bought the park there were three empty spaces. I brought homes in, sold them, and have been collecting rent plus mortgage payments ever since. I have had a couple of turnovers, where I had to spruce up a home and resell it, but I resold it at a price higher than what the tenant had paid it down to, so that worked out ok. And the three tenant/owners I have in there now have a great payment record. All three will be fully paid for in 5 years or less.
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But the potential money to be made is upon the buyer to invest in making it, such as buying a home to put there. If we are looking at it as a pure business decision it would be unreasonable to pay for a negative producing income stream. The park still has to pay taxes and insurance on a lot that does not produce and income. Each lot is an income stream for the park, negative or positive. An empty lot with utilities is a negative income stream and will become an even larger negative income stream in the short term getting a home installed. An empty lot is now a risk to the buyer and that risk is worth nothing for that space unfilled. The calculation for value of a lot is, lot rent multiplied by 12 minus operating expense and given a multiple for cap rate. That’s what my book says for the value of a lot strictly speaking for business purposes. However I do agree that the lot has value in that If I were interested in purchasing a zero occupancy park I would be forced to give some value for just the land alone. Now talking about POH on a lot that is vacant the price of the home is the value of the lot, since it is still a non producing income stream or negative since the home has tax the lot has tax and the insurance for the lot and the home are not being paid by the lot. My humble opinion. Legal info on My humble opinion, it is worth exactly the amount paid minus depreciation and transport fees.
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In situations like this I build a projected budget for the park with reasonable itemized operating expenses, and present it to the seller with my offer. If it’s not accepted, I tag a reminder to follow up on the park in 6 months and check in with the seller and see if they’re willing to come down yet.
Hi @Kristin
I wanted to ask a follow up:
If lot rents were $200 and there were 100 lots, and 50 were empty (numbers are to keep things simple),
then applying Frank’s formula:
$200 x .25 = $50 per lot
Would you then back out an expense factor of 40%?
$50 x (1-40%) = $30
$30 = NOI
$30 x 12 months x 50 lots = $18,000
Divided by a 10% Cap Rate
$180,000 as value of empty lots?
I guess my question is really - back out expenses from the 25% of lot rent calculation (or 50% in your case) or not?
Nice explanation as well. Thanks!
Wouldn’t an analogy be - it’s like buying a patent for an invention that hadn’t been produced yet? You’re basically buying the ‘potential’ to make money.
Have you ever heard of anyone structuring a ‘royalty’ fee on a deal, since it’s a similar analogy?
Ex:
For every tenant that ends up occupying an empty lot in a 24 month period, the buyer of the park promises to pay (Annual Lot Rent x .6 / .1)?
Where .6 = NOI calculation and .1 = Cap rate
Maybe an additional .5 is multiplied of that total as a ‘fee’ for the operational excellence that the new owner had to apply to get that lot filled?