Hi everyone. I’ve been enjoying your informative posts. I will be attending Boot Camp in November. I have met with a local MHP owner that is willing to sell on creative financing terms. 53 lots. 3 empty. 16 tenant owned. $310 lot rent. All other parks in town have lot rent right at $270-290. 33 POH $5-600 month rent.
Please tell me if I am valuing this correctly:
50×270×12×.6×7.5cap rate=$729,000
Or
50×270×12×.6×10cap=$972,000
This park needs a lot of work in terms of those POH look pretty bad. I was thinking the value lies between those 2 numbers…thoughts?
Your valuation will lie between those two numbers but your math is a little weird looking on the first one. If you are dealing with this seller off market, I would just have him produce last year’s tax return and a rent roll. That way you can rebuild the picture from scratch and see what it’s actually worth. With something like you are describing, we’ve seen expense ratios as low as the 30%'s and as high as the 80%'s. If your seller nails down his price at under $900,000, it might be worth looking into and getting a contract on it.
Thank you, Charles. Strangely the seller is kind of relying on me to value it and offer what terms I am willing to buy it under. I will propose 3 options: Master Lease with a certain amount per month. 0 down with seller financing on 2 different terms length. I want to be fair to both parties. I also need to be realistic about how much time I will have to put into the poh. This is not an attractive park. On paper it is. I don’t have much cash to put down but I do have a great relationship with local bank if it comes to that.
If I were you, I would nail down a price before you get too involved with it. If they want to play it like that, then you will need to get financials and a rent roll to accurately evaluate it. I’ve dealt with so many sellers who like that strategy but are usually unwilling/unable to provide financials. If you run into that, put it under contract at a price that is near what you think it’s worth and your contract will force them to provide the records you need to evaluate it. This is a very important time saving step because you just never know what’s going on until you have a look at their records. At the end of the day, there is nothing worse than sinking loads of time into a seller only to find out they want a 3CAP.
On your financing side of things, go for the seller financing or master lease. Either is fine. On stuff like this, I always tell the seller that it will need to be a low down even if I have enough cash to cover a conventional down. At the end of the day, they are the reason a bank won’t touch it and they therefore shouldn’t ask you to put the skin in a bank would want you to put in. I always like to start somewhere around 10% on the down and go from there.
Thank you. Very helpful. I’m on it.
Your first formula is wrong. A 7.5 cap rate formula would be 50x270x.6/.075