How do you value RTO income?


I’m curious how investors value/underwrite parks where there is a component of RTO? For example: Let’s assume there is a Mobile Home Park for sale with 10 homes in the park, site rent $200 (all utilities billed direct to resident). 9 homes are straight resident owned with 1 home on RTO contract. Let’s assume that the RTO just began and they have all 24 months left in their payment schedule.

RTO Contract:

  • Deposit: $3,000

  • PMT = $500/month

  • Term = 24 Months

Park Financials:

  • Income = ($200 * 10 * 12) = $24,000

  • Expenses = ($24,000 * 0.25) = $6,000

  • NOI = $18,000

  • Cap Rate = 10%

  • Total Value = $180,000

If you are buying this park between the time that the RTO paid their deposit and the time that they make their first PMT (resident has 24 months left in term w/ remaining balance of $12,000), how do you adjust the total value/purchase price for the RTO contract? Would this be a dollar for dollar increase to purchase price? (E.g. $180,000 + $3,000 deposit + $12,000 remaining balance = $195,000)

What is clear to me so far:

I posted the same question to the BiggerPockets forum, and after those responses, this is what’s clear to me:

  1. It is important to know the value of the POH/RTO, regardless of the terms of the RTO agreement

  2. Once you know the value of the POH/RTO, do not pay more for the RTO contract than the home is worth.

  • Example: If the home is worth $15,000 but the seller sold it for $10,000 on an RTO contract, don’t pay more than $10,000 for it because if the RTO resident completes the RTO, then you’ve lost $5,000.

Anything else that you can provide would be appreciated!

Value the income stream of the RTO at 50%-60% of the face value of the contract. There is a likelihood of default. If purchasing a MHP with many RTO contracts you should set aside an amount for rehabbing defaulted RTOs.

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Thank you. I know that in my example above, the hypothetical was that all RTOs are just beginning. But, how would you value an RTO at the tail end of its agreement? For example:

  • Resident agreed to purchase home from Current Park Owner (seller) 2 years ago for $15,000
  • Resident put down $3,000 as a down payment
  • Resident has been paying $500/month for 23 months (only 1 month until 24 month agreement is complete)
  • If i buy the park while this resident has $14,500/$15,000 in equity in this home, and I will collect their last $500 payment before transferring title, then I shouldn’t pay more than $500 right?

Let the seller continue responsibility for the RTO home. We consider such contract of little value since you could still need to rehab the unit if buyer of home cannot complete contract and can take your valuable time away from sale or pursue another park. Your time has value!

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Thanks, Carl. How many sellers are going to be on board with that? Making offers is competitive

Your in the driver seat until your sign a contract. In the past 5 years we have passed on more than 10 parks during DD. For park seller (we just sold one in OK.) you just name a number and most ask when they can close. The problem for sellers is finding replacements or completing a 1031. We are under contact on a triple N with a 6 cap for our 1031 and NO problems just monthly checks. Most businesses have cycles like the 2007-2009 MHP business down turn----Maybe in 2 years sellers will be looking for buyers----buying at the top of markets is no way to make money easily!