I am looking at a park to buy in Pennsylvania. It was built in the 1960s in a town that seems to be economically stable and growing due to the increasing industry in the town (powerplants being built and the natural gas & fracking companies, etc.). There are a couple other parks in the area that appear to be doing quite well.
Details about the park’s history are hard to come by since the current owners inherited the park and have not kept many records. I have a P&L from last year which shows a 23% expense ratio. There are 23 lots and 19 of those are occupied (lot rent only, no POH’s). The park is on city water & sewer and all utilities are direct billed except for garbage pick up which the park pays. The lot rent is $150 currently but should be closer to $185.
Many of my due diligence questions have been answered but the big thing for me is that there are no P&Ls or rent rolls from previous years. This is a real mom and pop park and is not owned by an LLC which eliminates separate tax returns for income verification.
My visit to the park confirmed that there are many people living there and the park itself is in good condition (older trailers probably from the 70’s). The asking price for the 10 acre park is $370,000. The upside is that rent can quickly be raised and the 4 vacant lots should be relatively easy to fill if I brought in trailers to sell.
How does this deal sound to you guys? I’m not exactly sure how to proceed since there aren’t any of the typical financial documents available.
19 x $150 x 12 x .7 x 10 = $239,400 is the value of the park at a 10% cap rate.
If you raise the rent to $185, then the value at a 10% cap rate is $295,260.
The bottom line is that $370,000 is way too much, with $239,400 being the fair price and $295,260 being the highest price you could possible rationalize, if you absolutely love the park.
Offer the seller $240,000 and see what happens. They’ll prove to either be reasonable or stubborn idiots.
I have a park I’m looking at 39 x $265 x12 x .7 x 10 = $868k - using 10% cap rate formula, but using the other formula 39 x $265 x 60 = $620k. Questioning on moving forward, but since I’m in the middle, will start DD. Thoughts and comments welcomed?
Looking at going under contract for $750k, with owner financing 85% of purchase price at 5%. Public water and septic system. 25 of them are POH and not included in above analysis and will look to sell off as quickly as possible.
The “60 times” formula is a short-form that takes you to a ballpark 12% cap rate. The other formula is much more accurate and reasonable. The price, at $750K, sounds good. Obviously, the park will need extensive due diligence – especially on the septic – but the first step is to get it under contract.
Thanks very much Frank, now I understand. Concerned about all of the POH, thoughts on this? They bring in about $5k / mo. and if I apply the 60% expense ratio it’s an additional $24k to apply to debt service. Should they stay or should they go?
You can only count the lot rent component of the park-owned homes in your numbers (the same as the bank and appraiser will use). The homes can only be valued as what they will bring as raw trailers on the open market, without any capping of their income. If they are older, and the market will support it, they might be worth $1,000 to $5,000 each. But that’s AFTER they have been rehabbed, so you have to deduct the rehab costs, The safest way to approach POHs is the value them at near zero (other than lot rent) unless they are newer and actually worthy of more value.