Another local MHP reviewed.... comments welcome

Deal two I’ve researched this month.

Small rural park in a rural county with a trading pool of 43000 residents total. The local economy if centered on agriculture and prisons. There are 4 prisons in the area and the rest of the country side is dotted with farms. This park is situated very near two of these prisons and pulls a lot of residents from the staffs of each. Average starting guard salary $36,000/annually.

44 Lots Total

17 POH’s

11 LOT Rents only

16 Empty lot’s with all hookups ready to go

City Water/Master Metered

City Trash/Dumpster

Private sewer/Septic tanks

Underground electric service individually metered

Lot rent $125 a month and a little low for the area. Rental units go for $400 to $450 and all are full at the moment with rent being on the middle/high side of the local market for this type of housing. The park has all dirt/gravel drives and is full of pecan trees. It is clean and well maintained with all homes in decent shape on the outside. The owner performs all of the mowing.

I’ve talked with the guy and I’ve known him for a quite a while beside just this park investigation. He claims low maintenance numbers but frankly states his books are cooked to some degree and can’t be trusted. I’m visiting him again this week to chat and review them anyway. He knows I’m not actively looking to purchase anything at this time but he is still very willing to share his info freely. He is old and wants out of the business and may see me as a future prospective buyer.

I’ve split the rental business away from the MHP lot rents. I’ve just guessed at the ratios and have come up with the valuation below.

First the rental business which I priced at 70% of replacement cost of the homes. I calculated what I guessed the Rental NOI would be for me but did not include it in my purchase price only as cash flow.

17 POH’s X $7000 = Rental Business Value $119,000

17 POH’s X $290 (Avg Rent - Lot rent) X 12 months - 70% Occupancy - 40% Expense = $17,748 Rental NOI

I knocked the LOT values down to a 12.5% cap due to the road being unpaved and trees which need some work. Also with all of those pecan trees there has got to be some deferred maintenance or ongoing cost for septic line clean outs.

28 LOT’S X $125 X 12 Months - 90% Occupancy - 35% Expense = $25,200 LOT NOI

$25,200/12.5% Cap = $201,600 Lot Value

$42,948 Total NOI - $16,522 Debt Service = Cash Flow $26,425

$119,000 Rental Business Value + $201,600 Lot Value = Offer Price $320,600

Exit Strategy:

Improve cash flow by getting expenses down to around 35% through passing on water cost and raising lot rents gradually. Bring in 5 additional homes and begin selling POH homes on terms of some type or manage the headache of rentals for the cash flow bump. Establish 33 occupied lots with 35% expenses and $175/month lot rents. Sell for 20% cap of original purchase leaving some upside in the park with undeveloped lots.

I’m not a huge fan of this deal, unless you can get the seller to carry the paper with very little down. I don’t like the septics, low lot rent, vacancy, dirt roads, and my guess as to significant deferred maintenance. And when you get done, you’re still in the spetic business and in a not very sexy location (not sure where the park is, but it sounds that way). Even if you buy it at a 13% cap rate, you’ll probably only be able to get a 13% cap rate back out of it. And finding a loan for it with that vacancy and other issues will be near to impossible (unless a local bank loves the deal), so you’ll probably have to take a second for your profit and have the buyer assume the first.

I like the other deal 1 million % better.

I would have a few issues with this deal. First- unless you can get that pad rent up to 175, the issue of filling lots is going to a upside down situation. Second, septic systems are tough for me. Even if city water and sewer comes up, you need a new sewer line system to handle the project unless your on a master septic. In your math, I would give on value beyond the pad rent value to the rentals. The expense will eat the delta between the pad rents and the rental amounts. You might go backwards if your management team is not creative.

I would really check the state and local laws concerning the leach fields. If one fails, do you have the space to put a new one in? If not- then what? The rules for how they go in, and how they are built are ever changing and guess what- with every change the cost goes up. So know the hard cost of a septic tank replacement and leach field replacement, and look long and hard on a site map so you know yo have the space if the wheels come off the system…

Now- I like prison towns. I own in a prison area, I think 13 state and federal prisons in my parks area. It was unmoved by outside recession forces. Downside is, the town does not have much upside either. So the area is safe for me, no boom, no bust.

So before I would say yes or no, I would need to know more on the age of the systems, the layout of the park and the particulars of your market.

I wanted to ask, is it a good deal or reasonable one? I’m not familiar with the offer, I’m just familiar with washington state manufactured homes.