Expense Ratio & Septic


#1

Looking at a park with all TOH, city water, septic and city roads, the park is fairly small (around 30 units) and is within 10 miles of my home so I don’t believe I will have to hire a manager. The expense ratio the seller is showing is approx. 20%, is this reasonable? (During DD I will verify everything).

Additionally, is the risk of a park with septic greater, less or equal when each lot has it’s own septic tank vs larger tanks shared by multiple lots which requires a lot more sewage piping.

Thanks in advance!


#2

Is the water expense passed through to residents? That one expense makes a huge difference. And it’s probably safer to have every lot on it’s own septic as opposed to 2:1.

20% expense ratio is pretty low and they probably aren’t accounting for every expense.


#3

Tenants are responsible for water.
It seems they aren’t factoring much for the management expense.


#4

It is safe to assume that whatever sellers give you regarding expenses understate the total. You need to start from scratch and built you own numbers, which is not that hard to do and will get you closer to the truth.


#5

Most definitely. Question is does that % make sense with the park not being responsible for a lot of expenses.


#6

I would start with assuming the expense would end up being around 40-45%. As smallish park like that would tend to have higher expense ratios than a large park. But you really need to build your own no-BS, pro forma numbers.

A low expense ratio from the seller could be lying or it could be deferred maintenance and it could be both.

There are not that many categories to figure out; utilities, insurance, taxes, repairs, reserves, yard, payroll, and lumping all the little stuff like, office, advertising and banking, together in a misc account for the purpose of your pro forma. You should be able to get pretty close to real numbers.

If I was doing it I would not count POH income and would plan on selling them to the tenants if there are any in the deal. The problem with counting POH income is that the big expenses do not occur every month or even every year. You could be going along just fine and then have several move-outs that wipe out all of your POH profits.