Hello fellow “forumers”. I have a dilemma.
Came across an interesting park. 50+ lots, good location, good metro, strong rents (not stellar, but good). Current park rents are way under market (by about $100 - $150). 100% tenant owned homes. City water.
These are all the good parts.
THE BAD:
DEP is requiring park to switch to city sewer as it’s septic is failing to meet new regulations. Price tag is upwards of $500k to connect.
Owner has no money to fix it and is motivated to work with the buyer.
Because there is significant risk involved, I am thinking of offering a low/no down owner finance loan with no recourse. This way if i get into this business of connecting to public sewer and it get’s out of hand, i can walk away and not loose too much.
Any other creative approaches you could think of to make this work? If this even worth the risk?
Thank you.
If I was a Seller I would not like the offer you are considering. But if they will take it that’s great.
I think the win-win approach is to get very deep into what it’s going to take to fix this DEP issue 100%. Get several estimates from licensed contractors that have experience resolving this exact issue. Use that information, alongside the financials to come to a realistic valuation for the park. Now the hard part - what is your time and effort worth to deal with this headache? Use that as a multiplier to discount the park further so that the Seller can wash their hands of this and you get a great deal. The Seller will not like any scenario where they have an even bigger mess because you walked away from the deal.
You also need to get perfectly clear that there is no pollution liability associated with the failing septic systems as that could come back to bite you and the Seller. Three solid months of diligence will be needed on this one, with flexibility to extend if reasonable delays arise.
@jhutson, thank you.
Definitely would need a longer due diligence.
As it stands (assuming current rents, 40% expense ratio and no sewer issue) the park is worth close to 1 mil at 8% CAP and just shy of $800k at 10% CAP.
There is definitely a potential to hike up the rents, but that will be gradual (5+ years to get to market).
$500k is an actual contractor estimate to connect.
With that said, would 400k seller finance offer with 10% down be a reasonable offer to start?
PS. I like what @frankrolfe says: “I’d like to be a deal maker, not breaker”.
If you think 500K is a high confidence estimate and 8% CAP is a reasonable return for you then 400K seems like a fair place to start, especially given ability to raise rates.
I’d make sure the requirement to switch is legit. You usually have a grandfathered septic until it fails. If it’s individual units I can’t imagine they are all failing simultaneously. Verify the requirement is real and possibly employ an attorney if you can’t get a specific requirement in writing that confirms the statement
Great answer!!
Here are questions that I love asking County Officials.
“Can you site in writing the code I am violating/why I have to do this?”
“Can you site in writing your authority to enforce that code against me?”
They usually scratch their head and say “Well it’s just our policy.”
Agree 100%. If city is requiring this, how much of the price tag can they pick up? Also agree 100% w SDGuy below. Needs to be in writing with concrete proof before I’d take any action.