Seller over paid


#1

I am reviewing a park; that 2 yrs ago the the current owner bought and is now selling.
The lot rent was $265 with 27/35 occupied; 25 TOH 2 POH with rent to own in place. My simple quick calculation-$265 x 27 x 70 = $500k (do not know what the rent-own homes valued) soooo…
But he paid $630k for the park

Sell price today is $740k
Lot rents increased to $300
Same TOH 2 still on rent to own…
Tenants pay all utilities; city/county water and septic

But if I use same calculation $300 x 27x 70 =
$567k plus left over value owed on 2 homes

How do I say that he overplayed 2 yrs ago ( in my opinion )
And it is only worth $65k less than what he paid

What am I missing here
Thanks Rob


#2

Just as you did to us. No need to make him feel shameful. Simply outline what NOI is and what market rate cap rates are. If he doesn’t accept then either move on. But if he is trying to sell it after only two years then he prob wants out.

Best of luck!


#3

I don’t feel you owe owners any explanation as to why you feel their property is overpriced. Just walk away if it doesn’t fit your objectives.


#4

Yes I agree with @WhiteTrashGator. No need to tell them they overpaid. Simply outline your reasoning for the price. If they accept or are willing to have dialogue, great! If not, plenty of other deals to spend time one.


#5

Yeah I thought about that too, why so soon,
Is there something wrong
Thansk


#6

Correct me if I’m wrong… but shouldn’t the calculation be (using Frank and Dave’s formula):
$265 x 27 x .7 = NOI of $5008 per month
$5008 x 12 = $60,096… $60,096 x 10 = $600,960 (which is a 10 to 12 cap)
Note that this doesn’t include the poh’s.
It looks like he got a good deal on his purchase.

So if my math is correct, he bought the park somewhere between a 10 and 12 cap. My same math using the new rent amount makes a selling price of $680,400 a 10 to 12 cap. He is asking for $740k so is selling it below a 10 cap,


#7

@tmperrault @Bulgarino

Changing the expense ratio affects the valuation tremendously. Same with CAP rate. So you first have to figure your expense ratio and your CAP rate before doing a valuation.

Industry standard expense ratio is 43% (IMO). Smaller parks tend to have higher expense ratios as do parks with Master Metered utils. Let’s assume 43%.

CAP rate depends on size, location, and quality. Let’s assume 8.5% (park is in good market and has good infrastructure).

So:

$265 x 27 x .57 x 12 = $49,000 NOI /.085 = $575,000 Valuation.

That is how we do back of the napkin valuations. Determine the expense ratio and CAP rate and go from there. Currently, we use 43% expense ratio and 8% cap rate. Happy to talk more about this if you’re interested. Go get em!


#8

Thanks guys
I never seen the frank and Dave calc
Just some blogs and podcasts and saw lot x space x default (60, 70, 80) for expense and it gives overall value
So
265x27x70(30% expenses)= value ($500850)
300x27x70= $567k

So thanks and I will look further into the calculations


#9

Wilbus is correct in regard to actual expenses for a smaller park. They are usually higher than 30%. If you are making a ‘best guess’ I would use his expense ratio. If the expenses are actually 30% then use that number.

Don’t forget that after you determine the monthly noi, multiply that by 12(months in the year), then by 10. Or, a more accurate way, is to use Wilbus’ calc for the valuation.