Please Help Evaluate Deal- Our First Park!


#1

Hi Everyone! We’re close to making an offer on our first park and just wanted to get the experts’ opinions- would you do this deal? Thanks in advance!

34 lots
1 vacancy- old, park owned home on lot, currently for sale
8 rent credit park owned homes
Avg. Lot rent $240
Avg. poh rent $340
City water and sewer directly billed to tenants
Electricity supplied by power co. and billed to tenants
1 street thru park owned and maintained by park, the other roads surrounding park owned/maintained by city.
3 acres
On site manager who owns in the park. Maintains grounds, some repairs/maintenance, resident relations. Paid $200/month + free lot rent.
Good metro area, jobs, housing prices and city data
Asking price $900,000, seller’s claiming ~10% expense ratio…

Here’s our Park Value calculations:

33 x $240 x 70 = $554,400 initial park valuation

33 x $240 x 12 x .7 x 10 = $665,280 at 10 CAP

We’d want to offer at a 12 CAP which would be $554,400…and maybe settle at 10 CAP but man we seem to be very far away…

The notes on the rent credit poh’s are included in the sale price. Should we also purchase the rent credit poh’s or leave those out of the offer? What is the advantage of that and is that common?

Thanks for any help, suggestions or advice!

~Tiffany


#2

What are the market rents?

Hows the condition of the park? And deferred maintenance costs?

When you say 340 on the POH are those including the lot rent in them? or is that in addition to the lot rent.

Have you guys discussed possible owner financing.

@Tiffany

Def dig in a bit more here as there might be a way to structure something between price reduction, if there is upside in rents , and extracting some value on the existing homes. Maybe not quite but don’t write it off yet, at least I wouldn’t especially like that utilities are direct billed and the market is good.

If you have any comments about the condition of the POH and age that can also be useful in this discussion. Also, any idea of the term of the length of tenants?

Has he given a breakout of the POH and what he thinks the park is worth?


#3

Is this off market? Obviously a 10% expense ratio is false. And I get that you don’t want to seem to be low balling them, maybe ask where they came up with that number(900k). Worst case scenario you make an offer and they say no…


#4

Hi Marvel_Equity,

Thanks for your advice. Here’s the answers (the best that I know) to your questions.

What are the market rents?

-I haven’t researched the market rents that much yet but so far it looks to be around $400-500 so there look like some upside there even though this park is in a small town.

Hows the condition of the park? And deferred maintenance costs?

-Park condition looks good- haven’t seen it in person but from Google maps and pics provided doesn’t look like much deferred maintenance- maybe replacing the road going through…we researched it a bit and could be ~$50,000.

When you say 340 on the POH are those including the lot rent in them? or is that in addition to the lot rent.

-Yes, lot rent of $240 plus $100. Half of that ($50) goes toward owning the trailer.

Have you guys discussed possible owner financing.

-Not yet…

If you have any comments about the condition of the POH and age that can also be useful in this discussion. Also, any idea of the term of the length of tenants?

-The poh’s have been newly reburbished, in good condition, aging from 1980’s-2000. Except one which is a ‘handyman special.’ Ha

1- 1970 (‘handyman special’ vacant), 2- 1980’s, 3- 1990’s, 2- 2000, 1 unknown. He’s valuing them all around $95,000 when adding them all up.

Has he given a breakout of the POH and what he thinks the park is worth?

-He’s given models, years and values of poh. He thinks it’s worth $900k and with very low maintenance costs according to him…

Hope this info will help the discussion! Thanks again!


#5

@Tiffany

If the market rents are 400-500 thats huge…

So just on a realistic possible valuation on market rents, 33 occupied lots 33x400x12 = gross annual revenue of 158,400. Lets say its a 30% expense ratio so NOI is 110,880.

I know frank and dave advocate the 12 and 10 caps but really these days, you might be 8-9 caps for a park like this. So lets just say 9 cap …

That sticks the value of the park at market rents in the neighborhood of 1.2 M.

So while on the surface this appears to be a dud, really there could be something there. Granted you may need some time to creep up to market.

Really if you can do this… he’s at 900k… POH are 95k. Have him retain those. So then you are at 805k for the park. 10% expense ratio like @Dominic730 says is crazy on real world numbers ( and also remember that the 30% is rule of thumb but verify what you can for how you run it and that might skew your numbers a bit) . But it doesn’t do anyone good to try and tell him he’s nuts. Just tell him, the way you, and most other buyers will run it, you will have to compensate a manager, the work he is doing free, you will pay, you have to pay an accountant to file a return , have a dedicated park line, pay maintenance calls etc.

So its being real amicable. You have an additional 20k of expenses but really he may not sell the park that cheap.

So you meet in the middle if possible. Will he consider 700k for the park , he keeps the homes?

So while you are overpaying for the park today , can you realistically get the NOI to 70 k quick? Then to 90, 100, 110?

A deal like this take a but of subjectiveness to it.

I don’t think people should over pay for parks but really you might miss out on this deal because if I came across it, maybe id pay 750k and be able to grab it.

If he’s a long term owner, id say you have about a 35% chance of seller financing. So maybe you can cone up a bit more for some better terms.

All in all, for me, i def think there is something here but you really have to understand it, weigh the upside etc.

Good luck and let us know if it turns out for you!


#6

I agree with Marvel – the market is more like 8 to 9% caps unless the park is really rough.


#7

@Marvel_Equity

Wow thanks so much for your help.

So it looks like I may have been too optimistic with the market lot rents…just called a few nearby parks, looked more online and lot rents ranged from $270-$330. Still, there is some upside from the current rent.

What’s the best way to find out market rents? I call so many parks but they never answer the phone! Haha

You really think a cap rate of 8-9% for a park like this is reasonable? I know it’s already a pretty stable park but that just seems low from everything I’ve read and learned at the bootcamp, etc. 10-12% is what we should be going for. Is the market just hot right now, is that why you believe that?

Thanks again!


#8

Markets change. You have to keep up with the times. The most important teacher is reality. It is possible to get the returns on the total capital invested that you are looking for by raising rents and filling lots.

If you are investing for fairly passive monthly income focus on cap rates. If you want to boost your cash flow through leverage, focus also on the arbitrage between market cap rates and mortgage interest rates.

If you are investing for capital gains, focus on what you can do to improve the profitability of a property. In practical terms, this mainly means raising rents and filling lots.

Lower cap rates are not all bad. Lower cap rates mean each dollar of extra profits (earned from raising rents and filling lots) is worth more in the market place.

An example will make this clear:

Say cap rates are at 12% an you purchase a park for $XXXXXXX (it does not matter for this illustration). Say also, you can raise the annual profitability of the park by $10,000. After a year you can sell it for a $83,333 gain at the market cap of 12%.

Now say cap rates are at 8%. You will pay more for the same park, but you get that back when you sell in a year. Again, you are able to raise the annual profitability of the park by $10,000. Now when you sell at the market cap rate of 8% you will pocket a gain of $125,000 for the same work.


#9

Agreed and thank you for the lesson. Cap rates have come way, way down because there is incredible interest in MHP sector. Large brokered sales are looking like 4-5 cap on realistic numbers. As you get smaller and less nice add points but rare will be a real 10% cap these days. Seller’s market.


#10

I understand, so then would that mean that the quick value formula Frank and Dave use (occupied lots x lot rent x 70 or 60 assumes about 12% cap) is archaic? @frankrolfe was still teaching this at the latest boot camp that we attended last month and it’s still all over the literature- should we be calculating values differently, with smaller cap rates then? I read in the home study course that in large metropolitan areas cap rates tend to be lower and rise in smaller, more rural markets. Large metro areas- 7-9%
Medium metro- 8-10%
Smaller markets- 9-11%
Tiny markets- 10-13%

This park that we’re considering is in a tiny town (under 5,000 population) but about 35 miles from a large city… higher cap rate right?


#11

You take what you can get / bargain for. The cap rate on “real” numbers is whatever you make divided by what you bought it for. Depending on how you manage, your mileage may differ.


#12

Let me ask you, as you are looking at deals what are the cap rates you are finding? I know there is a difference between asking price and sold price, but does it seem to you that normal is anything like 10% caps? What do the brokers who deal in MHPs tell you?

That is where you will find the answer.

I bought my parks 4 years ago at a 10% cap. How many people have taken the Boot Camp since then? How many articles have you read since then about park ownership becoming more respectable? As best I can tell the market in general has changed. Because the math model that explains this business is mostly about the power of multiplication, these changes make big differences.


#13

Thanks guys, we’ll just have to see where our numbers land and make an offer that makes sense to us. Thanks for all your input!