How do I explain to a seller why I do not use mobile home rentals to calculate a fair value for his/her park? thanks.
Don’t do that initially. Give your offer without explaining those details. If you break the business into two parts – a lot rent only and a home only – you may find that the home segment is actually losing money and you never have to have that conversation. Here’s an example:
Assume that the lot rent is $300 per month and the home rents for $500 per month.
The lot rent value is $300 x 12 x .6 (park pays water and sewer) x 10 (10% cap rate) = $21,600
But here’s how he looks at it: the home rents for $500 per month and then costs $100 in R&M, $25 in insurance, $20 in taxes, $50 in extra manager cost (parks with a ton of homes typically pay far higher in manager expense than you need to) and now he’s at the exact same price per lot as you were at.
We have seen parks where the homes actually made the value of the park lower as the expenses exceeded the revenue.
If you tell him on day one “your houses are worthless” he will be hostile. As long as you end up at the same number, why get in that argument?
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There are two ways that I normally do this:
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Because banks don’t. They capitalize the lot income.
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The widely accepted business model in this industry is that the homes are sold off. Look at ELS, Sun, Yes!. They all try to position their parks this way. Their yearly revenue would be higher if they didn’t, but they would all get eaten alive with R & M and management if they didn’t.
If your owner is more sophisticated, you can usually have the leveraged vs unleveraged returns conversation with them and they’ll get it. If a bank won’t finance it, then that segment has to be separated and capitalized at around a 20+ CAP rate. If they aren’t sophisticated, then you can typically devalue the homes by having a conversation geared towards how much of a headache they are. You can also ask them if they really think the home is worth X number of dollars based on capitalized revenue.
As Frank states, we are working on a park where the home maintenance has made the park worth less than it should be. For this park their stats are 51 lots, $280 lot rent, & w/s billed back. The seller’s NOI is very low because he spent $120k on his 30 POHs last year. We are paying $650k for the park and feel pretty good about the deal. For this owner, we never even brought up the home rent capitalization.
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No problem. The one thing that has helped me is to attack the weak point in a seller’s evaluation and not focus on how they should do it. Truth is, every one of us looks at a deal a little differently. Typically, I can figure out a price that’s interesting to me with very little information. If the seller is a little off on this price, then I’ll go after the part of their evaluation that I feel like I can have the most impact on. Rather than focusing on where we differ in evaluation methods. The goal should always be to get your price. All of us are still perfecting little ways to do it and every seller changes the way we feel about our secret sauce. Just focus on what makes your seller tick and I think you’ll find the solution to getting your price.
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@CharlesD make a very valid point:
“The one thing that has helped me is to attack the weak point in a seller’s evaluation and not focus on how they should do it.”
In negotiating in the end you would like to have a “Win / Win” situation.
There are a lot of people (including Commercial Real Estate Agents…just ran into one yesterday) who capitalize Home Rents (which is not correct).
However, in the end would you like to be right or would you like to buy a good MHP?
If your end goal is buying a good MHP, do as @frankrolfe suggests and:
“Give your offer without explaining those details.”
We wish you the very best!
How would you value that has all park owned homes as rentals?
IE say its a 50 space park and all 50 are occupied. Lot rent is $300 and home rent is another $300. City Water, City Sewer, City Streets, sub metered electric.
When you say “sub-metered electric” do you mean that the electric is master-metered and then the park bills it back to the tenant?
Who pays for the water and sewer?
Hey Frank,
Yes, one bill to park then billed back to tenant.
Just tackling your basic numbers let’s assume that everything has a 50% expense ratio. This would mean that a 10CAP is $18,000 ($900,000) lot and $18,000 ($900,000) home for a total of $36,000 (1,800,000).
$900,000 for the lot income makes sense. This income is lower maintenance and less hassle. Tenants who are homeowners tend to have some pride of ownership and take a lot better care of their unit when they own it.
$900,000 for the inventory is suicide. Being out doing diligence today reaffirmed this to me once again. Park owned homes tend to get beat up extremely quickly so capitalizing this over 10 years is just plain dumb. There is no way that a used POH is sustainable over 10 years at a 50% expense ratio.
Your solution is to not have $18,000 tied up in each home. Instead, you need to be very conservative with this. The idea of making money with these things is nothing more than an illusion. When you actually go look at one of these $18,000 units, what you usually find is that they have soft floors, water damage in the walls, need new skirting, etc. When this realization smacks you in the face, you’ll likely forget about this extra $300 income stream and realize that selling these off is much safer. Point is, when you go out and look at these 10CAP homes, you’ll quickly realize they aren’t worth crap. They’re worth what you can sell them for minus churn and initial rehab.
Charles is so right. They’re worthless, especially if older. I paid $0 for 69 older homes and I’m in the process of selling them. I would honestly GIVE them away if I didn’t know that’d just attract the wrong people. I have to invest money in each one, then rent credit sell them. It’s a hassle for sure but in this particular park it’s wortth it.
Great thread guys… Your opinion please
I’m looking at a mom and pop owned place with 22 units (21 are POH’s).
TOH pays $150/month lot rent.
POH tenants pay $100/week.
City Water - owner pays, doesn’t bill back. Septic.
Owner reports total expenses approx $25,000/year.
Owner wants 500K for the park, will carry financing (on $400K) with 100K down… terms negotiable. Good location.
Do I have enough info to make an offer here? Homes are older but in very good condition and the park looks great with a newly paved street.
Any suggestions on an offer price? Naturally I’d like to limit my downpayment.
Have not done a test-ad yet. Market rents estimated at $225/lot rent and $550/total rent for POH. Would like to sell them off through Rent Cred program.
Owner would be okay with selling off homes.
Thanks!
Fisupraguy,
What you’re talking about here is a “master-metered electrical” system. That’s a deal killer for us right off the bat. The only exception is when 1) you have an electrician do a study and the total amp consumption of the park is about 80% than what the lines will hold (and you are not bringing in any more homes) or 2) if the location and economics are so strong that it makes it worth the risk.
Newport,
22 x $150 x 12 x .6 x 10 = $237,600. No way that the homes are worth $13,000 each – more like $5,000 maybe unless they are newer. This deal is probably worth around $350,000 tops. But there’s a bigger problem – the septic system. In a larger park, you have the scale to fix things (although even then nobody wants private water or sewer). But in a park that small, there’s no way you want to tackle private utilities unless the location is unbelievable. How much excess land do you have to replace the drain fields? And will the city let you replace them at all?
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Thank you Frank. There is some excess land but not too much. I’ll look into the city’s policy allowing septic field replacement.
Thank you again. We are anxious to buy something and I almost pulled the trigger!
Will keep researching and shopping, and reading here. Looking forward to bootcamp in Charleston in a few weeks.
Andy
Thanks! Quick question for you. What would you value for the park if it was not master metered electric?
Newport, slow your jets down, NEVER be anxious to buy something, at least do not let the seller believe you are in love with property. Even after you own the property do not fall in love with it–it is only stuff to make a great living. With the septic system I would pass since the cost is NOT predicable as to repairs or keep in compliance.
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