Evaluating a deal that's losing money


#1

How do you evaluate what a park is worth when it’s losing money? This deal I’m looking at is 58 spaces with 45 park owned homes renting at about $500 a month and lost about $40,000 last year. Looking at the P & L, they spent about 100k on home repairs and maintenance. I haven’t seen a rent roll, but their income has been plummeting so I’m figuring they have bad collection issues. Another issue I see is tenants are using about $65 of water and sewer a month. Also the manager is paid 30k.

The market seems decent, but not special. I’m not sure about demand. I’m thinking this has to be bought for less than if it was valued for stabilized expenses. I’m not sure how much of a premium to discount for an offer on this mess though.


#2

I think you would be doing them a favor to take it at land value. I’d question POH renting for $500 being in a decent market though. And a bank won’t loan on this.

Really interested to see how this goes for you. Keep us posted.


#3

The POHs are killing the cash flow. Things will not change if you buy till you sell all 45 homes. It will take a very long time and cost a lot of money.


#4

@jhutson

“I think you would be doing them a favor to take it at land value”

I hear ya. That’s hilarious though :sweat_smile:


@Greg

What you said is what I was thinking. I’m not sure what kind of offer to make on this. I’d think at least a 12 cap at “turned around park” financials, but even a 12 cap seems like too much upfront effort going through new tenant and park owned home turnover and expense.


#5

There is no correct answer to your question, it’s subjective.

I would first calculate the stabilized value of the park - if the park had been well run, how much would it be worth today? I would then start subtracting from that stabilized value until the discounted price looked like it was worth my time, capital, and risk. Anything below that discounted value is a deal, anything above isn’t worth it.

Best of luck. On the bright side, these really messed up parks tend to generate the most amusing bizarre tenant stories.


#6

Thanks @Noel_S . I agree with you. I’m pretty sure this park would require all cash which would make the deal needing to be even sweeter. I’m interested in where deals like this end up.


#7

Why do you say POH are killing the cash flow? Isn’t bad management killing it? If collections were improved and expenses controlled would it matter that much that there were POH?


#8

Yeah @Scoundrel8 it’s hard to say what’s killing this deal - the OP didn’t put a lot of detail to determine the reasons why this park isn’t working. This very well could be a great deal for all we know. There is not enough to go on here.