I recently made an offer through a broker for a 17 lot park that was lot rent only. Seller was asking $225,000. 9 spaces are occupied. All utilities/mowing passed on to tenants. Lot rent was 175 and the NOI turned out to be around 16k/year (I wanted something small with opportunity to expand). So I sign the LOI and make the offer of 170,000 and the broker tells me the next day that the seller thought the offer was too low.
When I made the offer I explained that this was a fair offer at 9.something cap and that the seller was basing his price on projections for an almost full park, which it is not. I said that I am not paying for the full potential of the park and I’m only willing to go to a 9 cap. So that was that.
Should I have made the offer at 225k, done due diligence and then made the offer at fair price once I collected all of my data? This is still a park that I’m interested in, but the seller is selling the park at around 7 cap and that’s kind of silly for such a small park I think. Thoughts?
Based on the following calculation–9 x 175 x 12 x .5(smaller park assumes higher expenses) x 10= 95000 approx. I would that your are over valuing the park at $170k. Does it come with a single family house or something? or are they willing to finance the deal at all?
also, there is no way that the noi is 16k based on true operations on a lot rent only park of this size. because 9 x 175 x 12=18,900. unless they absolutely do nothing to the property and tenants do everything then maybe it is 16k, but I wouldn’t fall for what the broker tells you. do you live close to the property? if not you will have to pay a manager at least part time.
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I appreciate you crunching the numbers. And I’m sure if I began due diligence then the real data would come out. But my original question was, should my initial offer be at the sellers asking price and then work it down to my final offer price? I’d rather not low ball an offer until I have hard data.
And not that I’m saying your numbers are low. But the seller would probably perceive it that way.
The numbers are what they are. They don’t lie, that’s why I love them…no issues with anything you said.
I would personally offer what I thought was reasonable. with this big of a spread with actual valuation based on 10 cap on how you would operate it, that is what I would base my offer on. If you want to tie it up and then have that conversation with them, that is something that you could do for sure and always would want to do…even frank says in due diligence manual to do so at the later end of the diligence process. only caveat is that if they don’t want to take a price concession and you have sunk money into your diligence, you are out that money. so since its with a broker already and its out there. I would make your offer, then let some other people make offers or let it sit out there and just watch it and touch based with the broker. then after awhile it should come down to real world pricing. these smaller parks are really make or break it with the purchase price as operating margins are slimmer. and what I perceive as overpaying is not always what someone else thinks is overpaying for something, that is the beautiful thing about the investing world of real estate.
also I will give one more thing. what is market rent…can you buy this with a lease option to purchase and bring it to market rent and then find financing. financing is a huge portion when dealing with smaller parks too.
I looked at a 14 space park w/ similar lot rent and 11 occupied. I almost overpayed because I just wanted the park and wanted to get my first deal done(not sure if this would be)…
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I appreciate the advice. The seller is an 82 year old pop and apparently has some emotional attachment so I’ll probably just move on and maybe touch base every month or two. The market rent is closer to 200 so there’s definitely opportunity to raise rents immediately. Also, the seller was willing to finance with 30% down which is another reason I liked the deal.