How Do You Cap Rent Credit Park Owned Homes?


#1

My husband and I are currently evaluating a park that seems to be a good fit for us, albeit overpriced, as most are. This would be our first MHP purchase so we are new to this but did just attend the boot camp in Orlando and really learned so much in those three days.

The seller’s asking price is about 30% more than the number we got using Frank’s quick evaluation formula, he’s also claiming about 10% expense ratio…which seems very optimistic. The MSA is good, economy, etc. are all healthy. I believe it is in a flood plain though so flood insurance may be a large expense. Water, sewer, garbage, power all direct billed and paid by tenants. The park has mostly tenant owned homes with about 25% poh’s that he says were sold on rent/credit agreements and will be paid in full in about 3 years. The rent/credit trailers are mostly 80’s 90’s models with recent repairs, new roofs and I think about B-C condition.

My question is: Do we cap the income from the rent/credit park owned homes that are under contract and have been ‘sold’ to the tenants? I know we should never cap poh’s but what about rent credit homes? They haven’t bought them outright, will ideally be paid in about 3 years so haven’t really been sold as he says but he has received deposits and rent towards purchase each month. How do we cap that income?

There’s also a large storage shed that he gets rent for each month- that is real property but how is that capped?

Also, looks like the seller has left out some expenses in the P&L (big surprise) which will account for his unrealistic low expense ratio. I plan on getting more info from him. But, if the tenants all pay their own utilities, water and 75% own their homes really how much is a realistic expense ratio for a smaller park (under 50 lots) with no amenities and a live in park manager? 25%?

Any help is greatly appreciated!
Thanks,
Tiffany


#2

The expense ratio was be in the at least 25% but probably 30% or higher. Typical mom and pop…they do all of the maintenance, management, etc. and don’t pay for their time.

Rent credit - by definition a cap rate assumes income into perpetuity. You have three years of payments.You take the risk they might default, plus the time to collect all the payments. Those notes are worth very little.


#3

A 10% expense ratio is crazy. Did you notice any snickering under his breath when he said that?

It would be helpful to know what the lot rents are. Raising rents will change the expense ratio if there is no change to the expenses; obviously, but how often do you see the expense ratio rules of thumbs tied to rent ranges? Also tiny parks will have higher expense ratios then huge parks. I have no experience with parks with low lot rents – $150 and below, but with parks in the lot rent range of $250 - $300 or so, I use 40% for the expense ratio for my back of an envelope calculations. I would be happy to be proven wrong for over stating expense but I like to be conservative when doing projection and my experience so far as a park owner is things go along pretty well and I think I’ve hit the sweet spot and then a snake gets in the garden (for you Prof. JBP fans) and I have to realign my thinking with reality.


#4

I would just cap the lot rent income (from the “real” property) and not the rent portion of the rent credit homes. Treat it’s caped value like it’s just a lot paying home.

I would personally not cap the storage shed as real property. I’m not sure what Frank and Dave would do. From what I understand, storage lots at mobile home parks don’t get market rates because customers are limited to tenants. So the amount you’d get might be 50% of what a storage place would get because the average public isn’t going to want to store things in a park. You might want to give them some value for the storage sheds if you think they are viable long term income and it helps your purchase numbers work. I wouldn’t cap them over 50% of what they produce though personally. 25% sounds more appealing. My feeling is not all future tenants would want to pay for the shed.

Well generally larger parks will have somewhat lower percent cost ratios. Industry standard is supposed to be 30% for utilities paid. At under 50 lots, that may be a bit higher. Achieving under 30% seems very difficult to me. At 1% property tax (yours will likely get higher) you pay about 7% of NOI to taxes. Then you’ll probably pay 7-8% or so to a manager so you’re already past 10%. Also Florida is known to have high insurance costs and you want some money left over to pay for sewer issues. I’d look through the due diligence manual well.


#5

Hi Erik, thanks so much for your reply. So this isn’t a mom and pop, the guy is In the mh biz and recently stabilized the park and is now probably selling for a healthy profit. Wish it was mom and pop haha. He’s stating around a 10% expense ratio which seems crazy low but from all the info that I’ve gathered he doesn’t seem to have many expenses- can’t be close to what he’s stating though… 75% tenant owned homes, the rest on rent credit agreements, tenants pay all utilities and he just has 1 road going through that he has to maintain. That might prove an expensive capital expense down the road though if we need to repave or fix pot holes, etc. So we shouldn’t cap anything from the rent credit income from the poh’s?

If we want to pursue this deal we’ll just have to do our homework and plug in the realistic numbers for expenses to prove that our offer is legit.


#6

Hi Randy, thanks for your input. I know, around 10% sounds crazy… And it’s just us newbies having to convince him that it isn’t realistic- of course, looking more in depth into his books, taxes, etc. will likely support that during diligence. It’s just that I don’t want to piss him off initially by offering $200k less than the asking price (ours ~25% expense ratio, his ~10%).

The lot rents are $250 with just one vacancy. I still have to snoop around the nearby MHP’s and see what the market rent is but it seems pretty avg. for the area- Midwest. We would raise the rent $20 next year if it’s below market. That would definitely help. Just want to make sure we’re being smart about this as it would be a ‘relatively’ easy park to manage from afar.


#7

I know there have been a number of threads lately where everyone piles on about how important it is to get golden P&Ls, taxes and bank statements from sellers

Yeah, fine, I guess.

But I have never seen that as the key info for basing my buy/pass decision. I think it is more important to build my own P&L during DD and to build a P&L of where I am going to take the property.

It is not that hard. Look, here are the main expense categories:

Utilities
Payroll
Repairs/Maintenance
Insurance
Taxes
Yard
Travel
All Other

You can nail down most of those or get pretty close by making some phone calls. Some of those like travel and even payroll are pretty much up to you – is the park in your back yard or are you going to have to fly to it; how often? How much are you willing to pay a manager. Are you going to hire an in house handy man? Who is doing the yard now? Talk to him and see what he wants to continue. An insurance agent should be able to give you a pretty close number on what a policy will cost you. Who cares what the previous owner was paying; are you going to have the exact same coverage? Are the prop. taxes going to change after the sale? Better call the county and find out; it does not matter what the seller was paying, it matters what you will be paying.

It makes little sense to me to go by the repairs/ maintenance expenses paid by the seller. If it is low, maybe he has not been taking care of things and it therefore is going to be high for you. If it was high, maybe that means he took care of a lot of issues that you will not have to deal with. Who knows? Better to figure out the condition of that part of the park you will be responsible for and get an idea of what your costs will be going forward.

It would be useful if he could provide you with the utilities bills, and if he give you the"my dog ate the receipts" routine, then he should allow you access to the utility accounts online. Its all there.

In the All Other category are all the piddly accounts like banking fees, office expenses, postage, as well as accounts like legal services that (hopefully) only come up once in a great while. They add up, but you really can’t go by the sellers costs (is his office in a spare bedroom like mine or does he rent a real one that you have to put on your shoes and drive to?) Better to add them up as best you can and throw in a few hundred for who know what.

I am not saying I don’t want anything from the seller, I will take all I can get. And I understand that if you need a loan, the bank may require it. What I am saying it is I think it is far more important to look at the numbers that I build through independent research and from my experiences than the numbers provided by the seller.


#8

What I would prefer to do is let the seller keep the notes on the homes, same as though the residents had bank mortgages, and not include the homes in the purchase of the community. Draw up separate lot rent leases with each tenant.
You then only base your cap on the lot rents and never have to deal with the homes.


#9

Hi Greg,

That makes sense since we would have less risk/expense of owning the trailers but how do we convince the seller if he just wants to move on and be done with the park? Is it pretty common for the seller to keep carrying the notes on the trailers after the park has sold?

Also, what about the risk of having just one person owning 25% of the trailers in our park and potential problems like moving them out before the renters own them?


#10

Hi Randy, thanks for all that, you make a lot of sense. He really hasn’t given us detailed info on his expenses so we’ve been doing just what you advised: researching and plugging in our numbers for all the expenses. We’ve been using the MHU deal evaluator they gave us at the boot camp and that’s been a huge help. Currently our expense ratio is at 30% so I feel much more confident if we move forward with an offer.


#11

You convince the seller by making two offers. One offer is based on lot rents only the other, including the homes, offering next to nothing for the homes themselves.
If he takes the first offer the sales agreement would have a clause preventing him from removing any homes from the community. You would maintain authorisation to screen any change of residents for the duration of time that he holds any notes.
Reality is that your offer will likely pi** him off since he is likely way over priced. Nothing you can do about that unless you are willing to over pay.