Let me preface the question by saying I fully understand that it is normal to not capitalize vacant pads. But how would you account for their value if you are offering on a park in a metro with other nearby parks that are full and you’ve demonstrated to yourself that there is demand for the product? Obviously once you’ve capitalized the occupied pad rent into your price, it is nice to have additional vacant pads to grow into if you feel demand is in the market, how would YOU account for this value?
If the replacement cost is greater than the park’s business value then I would use that approach, otherwise I wouldn’t use it at all…
Under the conditions you mention a seller will justify their business value with a lower capitalization rate equating to a higher purchase price - similar to the rates for apartments in that market. It’s subjective (to a degree) and that’s the beauty of it…so long as it passes muster with the buyers appraiser.
Hope this helps.
Thank you for your input. Fair enough.
I’m the buyer in this scenario and there is no lender, so it’s up to me to value this correctly. The park in question is rather unique in that it was severely mis-managed and then foreclosed. The tenants had no operater for a long duration, and from what I understand lost water, sewer back-ups, no garbage etc. so many tenants moved on. The current owner got an amazing deal then cleared the beyond repair homes to ready for a quick flip sale leaving a mostly empty park in a decent area, with demonstrated demand. it’s hard to value given that it’s mostly “value add” with filling vacant lots. Loads of work ahead.
IMHO… Isn’t the beauty of a “value-add” deal the “value-add”? In other words… why would you as the buyer value a vacant pad? A business is worth it’s value that it is currently producing isn’t it? If I sell my park to someone are they going to give me a value for income I “could” be making but am not yet? OR are they going to value my park for the income it is currently generating? As the investor who buys the park and invests the capital and effort to bring it up to it’s potential … YOU are the one entitled to the rewards of all that labor and expense. NOT the person selling it who hasn’t done any of the above.
1 Like
@ToddC , as per your question:
- “How do you value vacant pads in a decent metro?”
My Husband and I own 2 Mobile Home Parks:
- 1 MHP = Stable
- 1 MHP = Turnaround
I am a Licensed South Carolina Real Estate Broker-In-Charge.
Here are some valuations that others have voiced for valuing Vacant Mobile Home Lots:
- Me = 50% Value
- My Husband = 25% Value
- Frank = 0% Value
Let us say that you could purchase the following Mobile Home Parks for the same price; in the same, good Metro area located side-by-side; with the same utilities (public water & public sewer); & assuming you could get equal financing options (or pay cash):
-
MHP #1:
Lots - Total = 25 Lots
Lots - Filled = 25 Lots -
MHP #2:
Lots - Total = 50 Lots
Lots - Filled = 25 Lots
Both MHPs have 25 Filled Lots.
However, which MHP would you prefer to purchase?
For me I would prefer to purchase the 50 Lot MHP (as there is upside).
Yes, you will have greater expenses (mowing, taxes, road repair, etc). However, some of these expenses will go down or away (mowing) when you fill up the lots. Also, the other expenses will be off set by greater income.
Our Turnaround MHP is an example of the above.
-
MHP - Turnaround = 2014 - March:
Lots - Total = 65 Lots
Lots - Filled = 27 Lots -
MHP - Turnaround = 2018 - November:
Lots - Total = 65 Lots
Lots - Filled = 59 Lots
Was it a lot of work to fill 32 Lots in 4 .5+ Years? Yes, most certainly yes.
Was there ‘some value’ to 38 Vacant Lots when we purchased the Mobile Home Park? Yes, most certainly yes.
Now ‘what value’ those vacant Lots are is certainly up to you and the Seller to negotiate.
We wish you the very best!
2 Likes
Take the value of the lots after they have been filled, subtract the cost of filling them, divide by the risk factor, multiply by the time value of money you are spending prior to filling the lots, add in the cost of your aggro, and that’s the max value you should be willing to pay.
Or you could estimate replacement cost and discount that by the same factors above.