The ARC Auction


#1

Well I don’t know where to start, there is really a lot to say about all the details of the auction…

First let me tell you that there was a big change to the auction just days before the actual date the number of absolute went from 30 to 15…

If you bought a package they sent this info in an update.

There were about 350 people there as bidders or bidders guests.

What happened at the auction blew me away ( just my humble opinion but

I think bidders paid WAY too much! )

At the end of the 1st round of bidding I turned to a few friends there, we all looked at each other with our mouths open and asked did you just hear what I just heard? 2.75% cap…

propery #7 was the property that the bidder selected, Hemet Ca, he paid

32,680,000.00

He was there in person on the other side of the room from me, why he paid what he did? Your guess is as good as mine?

David Protiva was sitting just behind me so he might put up a detailed list

so I’ll just metion a few points.

According to my notes 58 were sold total. 27 of them sold for a 10%cap or less. 5 sold in the 10%cap range. 8 sold in the 11% cap range. 9 sold in the 12% cap range. 0 in the 13%. 5 sold in the 14% cap range.

4 sold in the 15% cap range and 1 yes count em 1 sold for a 17% cap and then they stopped the auction.

If you ever get to really know me you’ll find I am a serious investor but also quite a character who has strong opinions but I am going to hold back and just leave you with the thought thats in my head, that famous quote by P.T. Barnum.


#2

Paul/Bob,

Thank you for the recap. I wished I could have been there but have been swamped with year end financials and current acquisitions. I am going to put a call into Sheldon Good and find out information post auction. I will let everyone know what I find out.

Corey


#3

Vida,

Seems like we are all thinking similar, you got a good cap rate on yours.

What did you think of the live band?, I was on the side where the band was & I thought it was way too loud I could not think stright and had to yell/talk with my friends,

I Hope they don’t pull it back from you.


#4

WOW , I just read all the posts, I don’t even think we can call it an auction.

I will never waste my time again with an auction like this one, I live in Calif, I went to view 5 properties in Texas, Airplane tickets, Hotels, Car Rentals & my time and I was willing to do all of this with the knowledge that I had a chance to get a deal.

The truth is that ARC never intended to get even remotely close to what they advertised as the opening bid prices, I call this FALSE ADVERTISING & deception. And I don’t buy the new management story for 1 second.

Also I think the whole reason for the cap rate auction was to put the bidding way out of balance in favor of the seller, because the bidders who are now pitted against each other actually should not be because they don’t even want the same property, only they don’t know it ( I can just see the ARC guys with grins in the background )

Heres the actual example of what I mean the first 3 winning bidders who each bid to below a 5 cap, not only were they not after the same property but each of them chose a property in different states, that means that the first bidder overpaid by millions because nobody wanted his park.

Bidder 3 & 4 paid less than 800K for their parks.


#5

What an interesting discussion on this auction. First of all, I feel badly for all of the folks who put in much time and effort in hopes of getting a deal at this auction. I spoke to many of you on the phone.

From what I can tell, the market (demand) is finally getting back to where it should be in terms of the actual product (mobile home parks). Many of the parks that have been purchased in the last three years have been for land plays only. Developers were scraping them clean and building developments one after the other. Well, it appears that is about to stop. I just read another article today that shows November as the largest single drop (percentage wise) in home sales in over 20 years. The housing boom is about to blow up.

Another factor that hurt this auction is that money is getting more expensive. Short term rates have climbed steadily for over a year and long term rates seem to be headed that way.

So, with the above factors, we are right back where it should be. Mobile home parks should be purchased for what they are…mobile home parks. Many of us know how to make money with these provided they are located in a market that supports them and the park is sound. I can’t help it if a large conglomeration like ARC doesn’t understand how to make money in this business. Maybe they should send some of their senior management to MOM or the Mobile Home Millions Conference and learn how to turn these properties around. Unfortunately, their shareholders probably won’t see that as a possible improvement either.

ARC is now faced with a huge problem, both internal and external. Internally, they didn’t produce the $200M promised at this auction. So, you can expect some serious screaming and possible legal action from their biggest investors. Senior management may be packing some bags as we speak as well. Externally, they put an extremely sour taste in the mouths of their only hope of getting rid of these properties. How many will attend the next auction after this debacle?

I don’t think Sheldon Good is responsible for the auction results. They did a good job promoting the event and from what I understand attracted many serious bidders.

What you may see next is an effort by ARC to get rid of these properties locally through a regional/national broker such as Marcus Millichap.

Just my 2 cents. I would have loved to attend the show in Chicago, but have been sick for almost two weeks. Fortunately, I’m feeling much better and ready to get back to normal.

Steve


#6

Stu,

Great post!

I just heard something yesterday that will really put a twist in the outcome of this auction for ARC. The gentleman (group) that bid $33M for the first property sold in the auction is stating that he told Sheldon Good that he was bidding $3M, not a 3 cap. rate. According to my source, he told them this fact less than an hour after being told he was the proud owner of the California property.

It appears that he is going to fight them to get his earnest deposit back. If this is the case, the auction results are really going to be pitiful.

On a separate note, one that reflects what jul is saying about the incorrect NOI, it appears that ARC went into a “fire sale” mode months before the auction with the company owned mobile homes. They sold several to investors at rock bottom prices. Now that ARC has decided to keep several of their parks, the “fire sale” will hurt them on the bottom line.

What a business we are in!

Steve


#7

Eric,

A couple of things are not correct on your calculation of value on this property using the 60/30 rule.

First of all, this rule is used only to calculate the value of the dirt. You show 2 “rent-to-own” homes on your sheet for $57,720. That should be $25,800 based on the new lot rent of $215.

Second is the value on the empty lots. They are only worth $6,450 each, which equates to a total value of $238,650. This is way off from the $550,000 you are showing on your sheet.

As a general rule, I don’t know of any experienced investors that would buy a property that is close to 50% occupied that has a such a large negative cashflow compared to gross income UNLESS it is a land play.

Oh, I forgot to add that it looks like this park has dirt roads. I would back out the cost of paving those roads from the purchase price when placing an offer.

Steve


#8

Eric,

There are several reasons I prefer land-leased parks over pure rental communities.

  1. Much less maintenance

  2. A lot lower tenant turnover

  3. They are worth more (sell for a lower cap. rate)

  4. Easier to operate from a distance

These are just a few things and we can certainly talk about this if we ever meet in person.

However, I wanted to address a few of your concerns on the way I evaluated this park in particular.

First of all, I ALWAYS buy a park based on its current condition and cashflow. I am not in the business of paying proud sellers for the opportunity to bring up a community to its past or future potential. I’m willing to give them something for empty lots, but it doesn’t make sense to give them full value for a piece of dirt that is not producing income. Many brokers try to sell real estate based on “proforma income” minus some sort of vacancy rate. And in some cases they are able to do so, but most of these sales are to people who don’t understand this business and often find themselves in trouble a year or so down the road. Believe me, I’ve met my share of these buyers over the past few years.

One thing you simply can’t do in this business is to evaluate the cashflow from rental homes in the same light as lot rental income. Unfortunately, most realtors place ALL of the income from a home rental community into the equation.

Let’s take your example of $500 per month on a used mobile home. If $150 was split out as the normal lot rental, we would have $350 per month of home rental income. That’s $4,200 gross income per year. Using the normal operating expenses found in a land-lease community (35%), that would leave us with $2,730 per year in NOI. Utilizing a 10 cap. rate would place a value of $27,730 for one used rental mobile home. I don’t know about your area, but I can put a used single wide home (less than 10 years old) in my parks for less than $12,000 all day long. Do you see the flaw in this type of analysis? The buyer should really only be paying for the actual value of the used mobile home.

I appreciate your feedback on this issue, it is very well thought out. You may very well indeed find someone who is willing to pay $1M for this park. However, I feel like it is my responsibility to give advice so that others can succeed in this business.

Separating dirt value from home value is a concept I will always abide by.

Steve