How to factor in rent to own in price offer

mobile home university
1

Looking at a park at a 9 cap but they are factoring in the monthly rent to own payment in their income. Is this normal? I would think you would have to calculate the price based on desired cap rate then add the note values on top of that.

If I’m right how do you generally educate the current owner that those payments cannot be considered in the cap rate calculation?

2

CAP rates are used to express the value of a perpetuity. A note has a set end date so it is not a perpetuity… It’s pretty straight forward and shouldn’t be too challenging to show them their error. The same could be said for a rental home since every good business model in this industry involves selling the home off now or at some point in the near future. Just because the current owner likes rental homes doesn’t mean the market likes rental homes… therefor, rental homes are not valued as a perpetuity in the marketplace.

3

I would separate the two income streams and place a value on them.

  1. Is the lot rent for the park.
  2. Is the notes on the homes.
    They don’t even need to be sold together, so I’d definitely evaluate separately. I’d look to see what is left on the note, and look for a discount on them. If they are performing, maybe 80-90% of remaining balance. If not performing, it depends on the home itself really. If it has more value than the remaining balance, I’d look for a 50% discount. Because you will either need to get it performing, or evict and resell. Either way, you have more work, more risk therefore the note isn’t worth as much. I wouldn’t want the note if the UPB, is more than the value of the home. Let him keep that one.