I know this has been discussed many times and the right answer is to not include income from POH into valuation of the park and to value homes as inventory at market price.
However, what do you do if everything is lumped together.
I am looking at a park that’s has a 68% expense ratio (and i don’t even think everything is included). And the big expense item is repairs and maintenance. However, i have no idea what % of that goes into repairing of POH and what to maintain the park.
For simplicity sake let’s say that:
Lot income is: $90k
Rent income from POH: $47k
R&M expense: $50k
Other expenses: $50k
————————————
Net income $37k
Owner is also asking $13k for each home (total 17 homes). Mostly late 60s to early 80s.
How do you price such a thing?
So would you say that the park should be worth 37k * 10 + value of homes (which is anything between 3-5k each??? )
So realistically not more than $370 + $85 = $445,000
But the asking price is almost double that. How do you break it to the broker and the owner? If their expectation is so high? Or am i miscalculating?
There is probably upside. Expense ratio should not be this high. But i don’t want to pay for that upside unless i realize it.
I always do a rough calculation of each POH based on what I could sell them for to those tenants - if a nice 1978 3/2 would sell for 15K, but needs 10K of work then that’s a 5K home. Do this for all homes and then add that to your calculation for the value of the park assuming all TOH.
@erikhanson
there are a total of 49 usable lots.
38 occupied
23 POH out of which 6 are vacant ( i made a mistake in my original post, i said there were 17 homes)
Lot rent is $210
House rent is ~ $238 (on top of lot)
Utilities are all city, submetered and billed back to the tenant. However the utility expense is still $23,463. Which again is lumped together and does not say how much is for water/sewer and how much is trash. So maybe there is some major leak somewhere?
I am trying to see at what price point this property would make sense. I understand there is some major issue with how hight the expenses are, but still not willing to bet on my ability to some in and lower it the next day.
@jhutson, how would you value a home prior to being in due diligence and having access to inspect them?
I’ve seen some random photos and they look pretty rough on the outside.
Looks like the seller is putting a $300k value on these homes…
Using Frank’s rule of thumb: 38 lots x $210 lot rent x 12 months x .7 (assumes 30% exp ratio for park only) x 10 = $670,000. Ignore the POH income and associated expenses as any income from them will most likely be offset by the expense of maintaining them. Then, you decide if you want to add any value for the POHs. I wouldn’t agree to $13k each, but in my mind, they are usually always worth something. You certainly can’t have a park without them. Good luck!
38 lots x $210 x 12 = $95,760 Less 10% Vacancy (POH Turnover) = $86,184 less 35% expenses (typical) = $56,020 / 0.10 = $560,000+/-. POH turnover may be even higher?
Get a breakdown from the City on the utility costs. Is it possible to bill back for trash or find a cheaper private contractor? Also, the current owner may be counting the income from the POH in with the lot rent income.