Park Appraisal with a 30% deduction off the top


#1

Hello all,

An appraiser was hired by owners of another park that I am looking at and they used the NOI evaluation method. Forgetting the 9% cap they used for a class c park with very little management, they deducted 30% of the value of the park for, and I quote the section here

“The net income was then capitalized by nine percent. This yielded a value of $242,577. A typical newer mobile home is now approximately 70 to 85 feet in length. Most of the lots in this park will only accommodate mobile homes up to 60 to 65 feet in length. Because of the size restrictions of mobile home lengths, we have reduced the value found by 30%, leaving a final value for the park through the income approach to $169,803. This has been rounded to $170,000”

Has anyone seen this type of deduction before? Is this something a bank appraiser would do as well or will they base it on the lot rents? I can understand different cap rates used by the bank and this only includes lot rents for revenue. I am trying to see what my targets would be to get to a 70 or 75% LTV value when I would refinance it in two years and this, seemingly arbitrary reduction in value, is causing me some concern.


#2

What they are attempting is to prove “functional obsolescence.” Or in other words, that the park is not equal to other parks because it can only fit certain lengths of homes.

This is common in appraisal practice; however, the appraiser still needs to prove that the market will react negatively to it. For example, older franchised hotels that don’t have breakfast rooms, pools, etc will typically have a lower nightly rate than a hotel with those amenities.

In this case if modern homes are available that will fit in the park and the tenants will still buy or lease the homes, the obsolescence would be hard to prove.


#3

Thanks for that explanation. So this is something that, when it comes time to refinance, the bank could have their appraisers do and I would be able to do nothing about it except find another bank?


#4

Couldn’t that be protested by showing rental income history?


#5

If buy it and if you have a vacant lot, maybe it would be worth it to put a new 65’ on it and sell it off, to nullify that argument.


#6

Yea the park has a couple 1 and mostly 2 bedroom homes, I could get new 24x50 3 bedrooms in but I feel the park is more suited for two bedroom homes. Regardless there are many new 2 bedroom homes to choose from that will fit these lots so I am confused as to the appraisers 30%. Its almost as though he only expects 3 bedroom homes to sell.

All the lots that have homes on them are filled, tenant owned homes. The only reason the other lots do not have homes in them is because the current ownership did not want to bother adding concrete slabs. They are regularly turning down people looking because they don’t want to pay the 3500 per lot for a slab. It is not because the market is not there.


#7

@Heritage You can also bring it up as a point to renegotiate if your lender wont loan as much as you thought on it. I personally wouldn’t accept that argument on a re trade as its something someone should know up front but i feel that 30% clip on value is too much. Maybe 10-15% lower than if lots were full size (and thats just arbitrary as well i guess)