While looking at parks and talking to sellers of parks with both park owned homes and some parks that have little or no park owned homes I have come up with a question of valuation.
For example say a 50 space park has no park owned homes, lot rents of $200 and city bills tenants water and electric. The value of this park would be 50 x $200 x 12 = $120,000 x .7 = $84,000 x 10 = $840,000
But a park that is 50 spaces, 15 park owned homes, lot rents of $200 and city bills water/electric. The value of this park would be 50 x $200 x 12 = $120,000 x .7 = $84,000 x 10 = $840,000 valuation on the lot rent and then the seller will want you to either CAP in the home rent income (which we all know never to do) or pay him a certain value for each home. If we say for example the homes are valued at $10,000 each, then you are paying $840,000 for the park and $150,000 for the homes for a total of $990,000
Thus it seems to a newby that parks with no park owned homes all else being equal are valued lower than parks with park owned homes. Am I wrong with assertion?
One caveat, I do understand some park owned homes are worth only their weight as scrap or are even a liability. I am talking about park owned homes worth $10,000 in the free market. And you can change that number to $5,000, $7,000, $12,000 and my question still remains don’t get caught up on the $10,000 number
You have multiplied by 10x to get the “value.” This corresponds with a cap rate of 10%. But the two parks would not justify the same cap rate in my calculations. You say, “all else being equal,” which is misleading. These are not equally attractive parks. I would demand a higher cap rate to justify getting involved with the 15-POH park.
Or, to put it another way, the parks are valued equally “all else being equal” (you said so yourself – $840k in your example) but the homes cost a bunch and don’t give you any stable (predictable) return.
You get out of the homes whatever you (sell them for - bargain for up) - what you put into them / how long it takes. It’s riskier. What’s the justification for that, as an investor? Higher expected return.
Thanks Brandon that makes sense, I should have thought about it that way. Guess I couldn’t see the forest for the trees. I guess the solution is to reduce my offer to increase the CAP rate to a higher number for the trouble/risk of trying to sell the homes back to the tenants
In short, value the park at a 10 CAP with lot rent only
+
Value the park owned homes only what I can sell them back to the tenants for (break even)
Then reduce my offer to create the higher CAP needed for this trouble
If you do the math with the numbers from above, and you want a 12 CAP for your efforts/risk, it works out that the seller is receiving almost the exact same price of $840,000 for his park and homes as if you only valued the $84,000 lot rent at a 10 multiple
Which reminds me of what Frank always says “park owned homes are only worth a dollar”
See math below…
Reduced my offer to the seller to $700,000 for the park + $150,000 for the homes if I knew I could sell the 15 POH to tenants for $10,000 each for a total of $850,000 up front which is a 9.9 CAP that turns into a 12 CAP after I receive all my money back from selling homes to tenants
So is this just really a bait and switch because your paying for the homes on the back end but lowering your offer on the front end ?
Am I still looking at it the wrong way? What CAP would you want to achieve in the end to make this example worth while?