We are in negotiations for a park with 30 filled lots. Current lot rent is $120/month. Market range is $250-$275/month. Offered price was $260k which is a 10% and a 40% expense ratio. (City water and sewer). During due diligence we discovered his expense ratio was 75% likely due to the low lot rent. How do I evaluate how much to pay for this park because it doesn’t seem to follow the Frank and Dave formula. Hopefully this will be our 3rd park and we are having trouble deciding what to do! Thanks for your input.
Kristend,I would approach it as follows:1. What would YOUR expenses be? The current owner’s is about $32k. Will the taxes go up with the new purchase price? Factor that in. Add any expenses that seem low. The main thing is how are you going to run the park (pay the manager more or less than current owner; set aside money for reserves; do more maintenance than currently, etc.).2. What are you going to raise the rent to immediately? Give yourself some wiggle room with some move outs based upon the rent increase.3. Now that you have estimated income and expenses, give yourself a cap rate that is appropriate (easy park to run ?10, hassle ?12)4. Now you can see if the $260k price makes sense or needs adjustment.Howard
30 x $120 x 12 x .6 x 10 = $259,200. You don’t have to take a leap of faith – simply recreate the expense statement using actuals (city water bills for past three years, etc.) and three bids on mowing and other items that you can’t trust 100%. Then compare the seller’s numbers and see where he’s screwed up. Then do a CSI investigation on why he’s so far off. Then see if it will be the same story when you own it. If not, then don’t worry too much about his numbers. If he was not good enough to keep the rents at market, then why would you expect him to do anything else right?
Your seller’s revenue is only about $40k a year with presumably $30k a year in expenses. Assuming you are going to raise the rents to market quickly, your numbers will likely be $90k a year in Revenue versus $30k a year in expenses. This makes the park worth in the $600k range. In any event, this is definitely one of those rare times where it is acceptable to “overpay” for upside. If you offered a 10CAP based on the seller’s numbers here, you would be offering $100k and probably wouldn’t get the deal done. As long as you are getting seller financing, then you shouldn’t have to worry about their numbers screwing up your appraisal.