Based on Dave & Frank recommends not to overpay for MHP by using the rule of thumb formula: (total number of lots - vacant lots) x rent/lot x 60 or 70 (depending who pays water and sewer)
In today’s market are investors using this formula to valuate and buy a MHP? I am new to MHP investing and it has been my experience that asking price for MHP is 50% to 100% over the formula number. Most of the seller price their MHP based on Gross Income - expenses = NOI / cap rate just as how apartments are priced.
Here’s a realistic example of MHP with 10% cap rate:
Income breakdown:
51 Lot rent income = $207,850.00
Water/sewer charge back = 18,326.00
Pet fee = 5,915.00
MH notes income = 9,175.00
MH insurance = 710.00
Late fee = 1,930.00
------------------
Total annual income $243,906.00
Expenses $79,904.00
Net Operating Income $164,002.00
Selling at 10% cap rate, asking price $1,640,000
Just from income/expense perspective, it seems to be priced right.
But If I use the rule of thumb the price would be 51 X $355 X 70 = $1,267,350
Over priced by $372,650
My question is how many MHP investors have used the rule of thumb to successfully purchase MHPs?
When I do find MHP that meet the rule of thumb valuation, they are either in middle no where with less 3000 population or in market with rapidly declining population or the MHP has some legal issues with the city.
I would like to hear from more seasoned MHP investors on their experience and how they go about realistically valuing a MHP. Thanks in advance.
– vilas
Off the bat, I can tell you that you need to take out the following:
Pet Fee Income: Is this one time or recurring? If this is one time, it definitely needs to go. If it’s recurring, you’ll need to decide whether or not you’re keeping it and if you’re comfortable paying $50,000 for an income stream that requires you to monitor the pet population on your property.
MH Note: You should not be capitalizing the income from notes.
You also have to factor in the upside after the purchase. If you can easily increase revenue or reduce expenses then the valuation may meet your investment criteria once you have made those changes.
I am looking at a commercial property (not an MHP) right now that has an 80% expense ratio. Part of that is 50K in discretionary legal fees, another 30K in other wasteful spending I plan to eliminate, and they haven’t raised rents in 5 years. All of a sudden their asking price and my valuation aren’t so far off.
I would not include water, pet fees, MH notes or late fees in the gross income. Just use the basic lot fees as the formula shows. Lot rent is the only constant.
The final number will be something between that and the sellers day dream number.
I would not go over 1.35M
Thanks Charles for your response. I agree with you that pet fees, notes, late fees & MH insurance should not be a part of the income since they aren’t recurring annually in a predictable manner but this is what I am seeing from seller when they price their MHP.
– vilas
Thanks Greg. If I do as you suggested, I am afraid that I won’t be able to buy a MHP since this is what most of the seller are doing to boost their price unless I buy in highly undesirable location. Have you had much luck trying to convince the seller to just price it on income basis only?
The rule of thumb is supposed to check if you’re in the same ballpark, it’s not a firm criteria that “you shall throw out all deals if it does not meet this…” If memory serves me the 70 multiplier is based on a 12 CAP.
If you’re okay with a 10% return and have done your diligence then do the deal.
It is difficult to convince seller to realise the true value to buyers if the seller is in no hurry to sell. They price high more as a fishing expedition than anything else. If someone comes along willing to pay close to what their dream price is they are the winner otherwise they simply let the listing sit.
I have made successful offer far below asking but what you really need to do is make the offer based on what you want to pay and tell the seller the offer stands and they can revisit it in the future. You need to include in the offer the reasoning why their asking price is unrealistic.
I am dealing with the exact same situation now although on a much smaller scale. I have offered 2/3 of asking and since there is no other interest in the property either they will come back at some point in the future, decide not to sell or eventually find another more willing buyer. It makes no difference to me as I am not willing to pay any more than I have offered (maybe a little more if he comes back).