I am evaluating a lot only park and the county’s Country Appraisal District Property Market Value: 85k. This would include land value and improvements.Whereas the asking price is 460k. The asking price is at 10% cap rate of the current income it is generating. I need to arrange for Bank Finance. However, i am curious to know how will the bank evaluate this property’s worth? Moreover, the property is in 500 year flood plain. Will this be an issue for financing?All your suggestions are welcome. Thanks.
The bank uses an appraiser that will value the property using what is called the income approach. They determine the gross income, then they determine the expenses- both actual and customary- and then they apply the correct CAP rate for the area, asset class and market conditions.
A good appraiser uses three valuation methods 1) income 2) comparable sales and 3) the cost to build. The income approach is straightforward. The comparable sales will depend on what other parks in the area have sold for (and that tax appraisal will not help if there have not been any). The cost approach will yield a value of roughly $10,000 to $20,000 per lot plus the value of the land (assuming there are no giant soft costs like tap fees, etc.).I will point out one big issue that will come up in your due diligence, and that’s property tax. If the property is currently valued at $85,000 and you are paying $460,000, then the property taxes could go up nearly sixfold at closing. To put that in dollar terms if this deal was in Texas at a 2.5% tax rate, $85,000 is $2,125 per year and $460,000 is $11,500 per year – a nearly $10,000 increase (and a reduction in park value of $100,000). You MUST use the full price tax amount in your budgets (even though you may luck out and not have the assessment go that high). This issue has derailed many a deal that has a ridiculously low appraised rate.
I have a question about real property tax assessments. Maybe this should be put in its own thread, but here goes:It is my understanding that the appraised value should be a function of the value of the land and buildings, not the value of the park as a business. If the raw land is worth X and the improvements are worth Y, then the assessed value should be X+Y, right? And we all know that the value of a park as a business is much greater than the value of the land plus the value of the improvements. Have you ever run into the county assessor who says, “Well I value the park by taking the number of lots (inc. non-occupied lots) and multiplying by a factor which I feel makes the value come out about right.” Because we are dealing with this. The valuation is insane unless you are interested in taxing the business operating on the land.In our case, the assessed value is far greater than the cost to rebuild the park from scratch. I could literally buy the land next door and duplicate the park (outside the city limits) and it would cost half of what the assessed value of the park is. Do I have ammunition to go over the head of the county assessor to the county judge?I mean, if I buy the park for $1000 from Joe Schmo who didn’t know how to run it and it was assessed at $500, and I now make management changes, improve occupancy, and sell the park for $2000, how can it be legitimately re-assessed either upon my purchase or my sale? I have added value to the business, not to the land. The neighbor’s real property value didn’t change because of my management. Why did mine?Assume the next owner turns the park into an ostrich farm, and runs the business into the ground and has to sell the deteriorated land and improvements for $100. Doesn’t that mean that the “real property value” was $100 all along, and the rest of my purchase price was paid for the “goodwill” (income-generating capacity) of the business?Brandon@Sandell
Every state and municipality are different, but the income derived by the mobile home park is, in our markets, a significant part of the assessed value. Mobile home parks are valued based on income. Property taxes are based on the value of the property (which in our case is income). The comparable sales are based on income. So income is definitely part of the system. and I would not try to go to court based on your argument.