Second thoughts on first deal

mobile home university
1

I’ve been patient and looking for my first park for a year or so. I’ve seen lots of deals. Finally got one in contract, I have a plan to turn it around, but my deal analysis isn’t what I expected.

The market: 12k city with increasing population, 6% vacancy, $830 2 bedroom apartment, $1,094 3 bedroom apartment, $88k median home value (thank you Best Places!). Located about 10 minutes from downtown. Metro is 750k population and increasing. Metro housing stats are similar to those listed above. The local economy is recession resistant: major universities, state capital, healthcare, and a decent variety of industry. Lot rent comps appear to be $250-300/month including water/sewer.

The deal was initially advertised as:

  • 52 total lots and one 4br 3ba stick built house
  • 85% occupancy (44 lots)
  • city water/sewer paid by park
  • average lot rent $225
  • 22 POH
  • 8 vacant pads

Based on this, my quick estimate was 44 x 12 x 0.6 x $225 x 10 = $712k (@ 10 cap)
Add in $80k for the stick built house and $110k for POH (22 @ $5k each)

Initial estimate was $902k. Listed at $980k. Got it in contract at $910k with 10% seller carry (amort 20 years, due in 10, 6% interest).

After a whole bunch of calling around, I have great financing lined up: 4.75% interest, 15 year term, 25 year amortization, 80% LTV (they won’t consider the seller’s carry as down payment). The bank is even willing to do the loan after the broker said the seller will not provide bank statements, P&L, or tax returns because he accepts a lot of cash and has other businesses mixed into his one LLC.

Some minor issues popped up in my due diligence: a possible lawsuit against the owner for mold (separate thread), one trailer has a pending settlement from some car damage, minor rent roll changes due to evictions and re-renting, etc. I’m still getting quotes for tree trimming and pothole repair. The broker also said there are only 21 trailers that convey in the deal. Tax records show there are 23 trailers that are POH, so the seller is keeping the best 2 trailers for himself.

So far so good.

But there are two issues that I’m concerned about:

  1. There are really only 39 lots (+/- due to evictions/replacement) that produce rent. Here’s what the other 5 lots are doing … 1 guy has free lot rent in exchange for mowing the common areas, one tenant lives free because it’s the owner’s daughter, two vacant trailers that need full rehab, and one abandoned trailer that I’ll need to get through the abandoned property process. So technically the revised price should be 39 x $225 x 12 x 0.6 x10 + $190k = $821k (10 cap), or as high as $892k at a 9 cap. So maybe we aren’t too far off.

  2. I’ve talked with the CASH program team, and it looks like I can extract somewhere between $180-200k by selling off the POH via the CASH program for used homes. So in theory I should have most of my initial investment back soon. But, as I model the deal on the MHU spreadsheet, my cash on cash hovers around 20% for all 5 years. I was expecting it to be much higher since my cash in the deal would decrease over time when I sell the POH. I’ve talked with Eric and he’s been very helpful. (This analysis includes billing back water, renting the stick built house, and price increases over time).

Basically, when #1 and #2 are combined, this deal is looking less attractive. I was hoping to get 20% cash on cash initially with it increasing over time, rather than staying static at 20%. Am I crazy?

The broker has indicated he’s overwhelmed with potential buyers after he posted it online, and the seller probably won’t budge on price.

I’m thinking I could ask him to rehab the 2 vacant trailers (but not rent them), and throw in the 2 nice trailers in exchange for me dropping the seller financing. I don’t need the seller financing since the bank won’t consider it as down payment, so he could walk away with lots of extra money instead of a 20 year amortization.

Am I crazy to re-think this deal?

For what it’s worth, I’ll be using a HELOC from another property for most of the down payment, and planning to pay that HELOC down as I sell the POH via the CASH program. The HELOC terms are very favorable and I consider it a low risk, short term loan.

Thank you in advance for taking the time to read and respond!!

2

To be clear- Cash on Cash is ONLY a benchmark the first year. After that you go to a return based on several models. In short to really determine your return, you need to look at equity after the first year.
You also need to understand your exit process. Your return on investment will differ if your going to 1031, cash out or if you are investing with a ROTH or other form of IRA.
For instance, a home you might get for $1,000 that makes you $1,000 per year looks like a 100% cash on cash return, and it is. But if the house is worth $100,000- then your return on equity is only 1%. That looks extreme until you really play with leverage, equity, capital etc…
In the long run, with this type of housing, your biggest bump for adding cash and increasing value comes in the first 18 months… maybe the first 6 months. After that- your will probably track inflation.
So your return will look more like a dividend return, and not a ever increasing curve. The rent raises most people spout are not sustainable over the long term, and probably are not adjusted for inflation. Raise rents 3% in a year inflation is 3% and you have not changed anything. The $ you get in is worth 3% less than last year- so your a wash.

3

I love the bank offering 4.75%, 15yr term, 25 year amort and 80% LTV!! You mind sharing the bank contact number? Thanks and good luck

4

The bank lending that is a local FCU. They only lend in certain counties near this park. I talked to about 20 different banks and loan brokers, and most weren’t interested. I really got lucky with this FCU.

Don’t overlook FCUs. They are regulated differently and can have magical terms.

5

So how does the deal look with the ACTUAL numbers, not the standard formula numbers? Can you post the actual numbers here? For example, the freebie lot rent can probably be offset in the expenses, since you don’t have lawn expenses.

It may still be a good deal. What are the actual numbers exactly?

6

What’s an FCU? Federal credit union?

7

Coach, yes, here are the actual numbers:

Income: Gross rent from 39/40 lots is at $14,340 right now. Half these are lot rent only @ $225/month. It doesn’t include the owner’s daughter’s trailer (she’ll supposedly start paying after closing), and it doesn’t include the stick but house income which should be $900-1000 once he moves out of the house after closing.

Operating Expenses:
Property taxes: $7500/year
Water: average $1600/month
Insurance: approx $3500/year
POH maint: average $1200/month
Manager: none (pop is doing it)

Of course, I can’t verify the POH maint expenses since the seller is not sharing his P&L, bank statements, or tax returns.

Debt service will be about $4800/month.

Thanks!