Lot Rent Valuation Help


#1

I am trying to come up with a way (formula) to place a discounted cap rate value on the lot rent cash flow occupied by a 1970 model home verses the same lot rent from a 2000 or newer model home. Obviously the older home only has so much useful life and can become a liability if abandoned.

I am thinking of this in a way like a shopping center buyer would value a national tenants rent higher than a mom and pop shop.

What


#2

Dang good question Rick… MH’s are a unique monster and can live basically as long as someone is interested in maintaining them, there does however become a point that the layout becomes a major issue.

I would place more on the size of the unit and the mortgage status than I would age as an absolute, there is a HUGE difference between a 8x and a 12x box. The 12x box still has life in it, the 8x is a dragon from a long ago time and place that just doesn’t fit in today’s world.

An 8x box has no value to me and is likely to become a liability on day one, I still have 2 - 10x boxes that still rent (I would likely better off selling them and collecting lot rent though) many 12x boxes, and my bread and butter is 14x’s. I agree that a 2000 model is worth more SO LONG AS it’s paid off, I’d rather have a lot rent park full of 70-80’s that are clear and free than a park full of pretty 2000 models that have mortgages with the wacky repo company that could care less! Point blank, Some of my best payers are lot rent tenants in clear and free 70 models, it may not be much to some folks but to them it’s home.

Best wishes,

Ryan Needler (who added absolutely no clarity to your question at all)


#3

Great question Rick! I think that in order to derive a formula to calculate the respective values, there are some variables that must first be quantified:

  1. How long do you intend to hold the property?

  2. What is the average total cost of replacing an older home with a newer home (ie removal, site prep, home purchase, rehab, lost rent, etc)

  3. Will you be replacing these homes only as needed, or at each opportunity? (ie when abandoned/vacant/turned in)

These are important points, because if you intend to hold the property only a couple years and replace only those homes which don’t make sense to retain, the lot valuation between new/old would not be much different, perhaps even limited to the extent that it makes the park more aesthetically attractive to the next buyer.

On the other hand, if you intend to keep the property many years (let’s say 20+) then you will also be replacing many of the 70’s homes (whether you want to or not!) and will, therefore, be investing a lot of capital that will not necessarily improve the value of the park, from a traditional “cap rate” perspective assuming all other things remain equal. In such a case, the lots with the older homes should be discounted by some amount.

There are probably other variables that need to be identified but these came to mind right away. As a guy who really likes math, I don’t think I could write an equation to solve for value without knowing the answers to many of these questions.

Maybe that’s why such a formula isn’t included in any guru’s course! I’m looking forward to the input of others and seeing where this goes.

Jeff


#4

I don’t think cap rate would be the best method to use when the quality/resilience of the cash flow is low.I would think replacement cost of the lot with improvements less removal cost of old MH, less whatever utility upgrades are needed. Of course if the lots won’t accomadate 16x80 home adjust value downward.

Perhaps you could verify if my observation regarding commercial property is accurate, When a big-box retailer (wal-Mart type) moves out of an old building - that old bulding seems to have $0 value. Put another way, it sells at aprice no higher than the value of the underlying improved real estate.

Post Edited (08-11-09 05:38)


#5

Thank you for the responses.

I will add more information to the basics of the question.

#1) I am a buy and hold investor (10-year minimum) who is always looking for ways to improve a community that has the demographics to support the improvement.

#2) These are all tenant owned homes.

1970 model paying $300 per month lot rent - clear title. There are (70) 1970 model homes in the park.

2000 paying $300 per month lot rent - has a lien $$?? There are (25) 2000 model homes in the park.

#3) The cost of a 2000 model 14X72 3+2 complete ready to sell would be $20K+/-

#4) The cost to remove the 1970 model home would be $3500. The cost to repair this same home could be $7K + ?

#5) I will replace these homes as the opportunity presents itself either from abandonment or tenant relocation. My philosophy is improve the community and you will improve your tenant quality provided you have good demographics.

#6) I will be creating another business with the newer homes = Notes

I may not be able to see an immediate land value appreciation to justify the cost of newer homes, but I will be creating another profitable cash flow from the notes.

#7) All lots will accommodate 16X80 homes

#8) Like a vacant Wal Mart I guess my 2000 model home with a lien and vacant could be worth nothing if I didn


#6

I am interested in your decission as to how what value to place on this type unit, and how you arived at that value.


#7

Rick,

I’ll chime in here. It would seem you need to work out an algorithm as Jeff (MI) is suggesting.

Somehow you will have to assign a useful life (in yrs) to any MH, combine this with expected debt service the tenant pays on the home (e.g. 1970-1980 = $0, 1990-1999 = 50%, 2000-2009 = 75-90%), against overall expected cash flow to the park. Wouldn’t it be great to know the actual monthly debt owed and year of payoff on each home! Would it be legal to ask this of each tenant, would they tell the truth?

Using the expected life, home debt service and park cash flow you could graph it and find the point at which you need to buy a new home.

I’ve seen this done in by mathematicians in college. I believe the applied course is called Mathematical Modeling. Maybe Jeff can tackle this for you or take it to the University and get the Math Dept. on it.

Steve


#8

You’re right Rick, I like paid off homes 10x better from a lot rent perspective! As for the homes themselves my personal take is that pre-hud are of lower value due to a lack of the hud seal and problems that can arise if you need to replace or upgrade a unit. I’ve personally found that they tend to be built better than more modern homes where they’ve tried to cut cost but that some materials used have failed the test of time. Maybe something like this:

50-75% value on prehud homes assuming (easy to sell but not likely IMHO) that half will eventually have to be replaced in the next 10-20 years. All of these most likely will be paid for clear and free, you might even be able get the owner a free paint job in the purchase to make them more attractive.

77-86 models are most likely clear and free and still have plenty of life left in them. 100% value on these, these are the bread and butter of my few lot rentals. Most common problem I see in this age model of homes is poly water lines… Not your problem with a lot rent park.

87-92 roughly 75% will be clear and free from my experience and are plenty cheap enough on the repo market to make sure they stay put… maybe 90-95% of value?

93-98 this is the remains of what little repo market exist in my area, the homes are coming up in cost and availability is going down. I expect that in coming years other park owners are going to pay premiums for these homes in order to move them to their parks. I can’t even guess on the percentage of paid off homes but it nears zero the closer you get to 99, this is the period of time that the finance companies where offering LONG term loans to push sales, 20-30k at 14+% and minimal payments takes a long time to pay off and I see a lot of walk away


#9

Hey Rick- Good topic.

To me, the difficulty in developing a method to quantify the variables you are suggesting is that the answer will likely vary widely based on the other factors related to the deal.

I know this comment may not seem productive relative to your objective with this post, however to me the other imput in the equation is paramount to the value of the result you’ll derive from your completed model. Ex. Is the deal a property which cash flows, but has significant vacancy? Or a cash flowing property with 90+% occupancy? I completely agree with Karl and Ryan in principal, I believe a resident with less debt can be viewed as a more stable revenue stream. I also believe that the ability to fill a park with substantial vacancy may be hindered by a Park with a majority of older (paid off) homes. In addition, the cost of debt may be impacted by the age/appearance of the community. From a cash flow analysis these variables are not immediately visible, however my opinion is that they are not lost on appraisers/ underwriters, and DUS lenders (especially in today’s climate). While I also analyze a deal with a long term outlook, the exit strategy must still be considered, perhaps even more weight should be given to the average age of the homes in the community with the knowledge that you will likely not market the community for sale for a decade or more.

Lastly, our model to buy communities which cash flow with significant upside in vacancy does, without question, expose us to additional risk during the lease up stage. However by purchasing larger communities, and pricing in this risk we can mitigate the ineffiency in our existing models. I would also be very interested in anything you come up with to help improve our existing methods. However, I do fear, at the end of the day personal factors and deal specifics may limit the widespread use of such quantitave efforts.

Thanks for the thought inspiring topic.

Ben