Basis for revised offer

Hi everyone,I am about two weeks away from the closing on my first park. After a lot of DD I emailed the agent explaining I wanted to significantly lower my offer after speaking to the town assessor and my accountant. The land and POH’s amount to a total value of $202,000 (assessed value based on 96% of fair market value + the remaining 4%= 100% market value). So my offer went from $320,000 to $202,000 overnight. Also, my accountant looked at the tax returns that say the income from the park for 2013 & 2014 average $24,000. This is not the nearly $40,000 NOI advertised. The agent responded that the assessed value has nothing to do with the fair market value and that the accountant interprets the financials differently than we should…for example she subtracts depreciation and bank interest from the profit when that’s "not an expense"Am I missing something? I thought my offer should be based on current fair market values of the land and trailers and that ALL liabilities should be factored in to get an accurate cap rate. I’m not buying shares of the seller’s S-corp…I’m buying real estate only.Thanks so much for any advice.-Mike

The agent is exactly right.  I wouldn’t pay any attention to what the assessed value is when making your offer.  Base your offer on numbers you are comfortable with.  Realize that your assessment will likely be matched with exactly what you pay for the park after you buy it.  Don’t let an assessor talk you out of a good deal.  How about some details on the park?  Number of lots, lot rent, who pays water/sewer etc.  Forum members will be happy to give you an opinion of value. 

Okay that’s interesting. I did not know it was more to do with the purchase price and not market value.

The park has 14 sites w/ 12 POH’s. The NOI is about $35,000 and the purchase price is $320,000. The cap rate is 10%. It’s located in a small town with a stable population in central Maine. It is on city water/sewer and the owner currently pays for all utilities except electricity. All tenants are older and has little turn over. Lot rent averages $225 and the average trailer rent is $600. Rents have not been increased in about 8 years and run a bit lower than nearby parks. I live about 4.5 hours away from the park but there is a tenant currently being trained by the owner to take over as on site manager. The owner will stay on for 2 months to help with the transition.

Let me know what you guys think!

Thanks,
Mike

None of those numbers make sense.  12 park-owned homes or resident-owned homes?NOI of $35k or gross of $35k?Your cap rate does not match your numbers.$225 times 12 paying lots is $2700 gross per month or $32,400 gross per year.So are home rents included somehow?  You can only cap the lot rent.This park seems to be worth less than $150k plus the value of the homes.

The gross was $79,000 in 2014 with approximately $47,000 in expenses. The NOI would be approximately $32,000. (Sorry I’m on the road and don’t have exact numbers with me)

There are 12 park owned homes with average rent at $600/mo.

There are 2 tenant owned homes where the lot rent is currently $150 and $300 (I used and avg of $225)

KEEP LOOKING!!     The upside with 12 POH is nil plus by paying a manager your profit is to low to bother with.      The next buyer will value 14 sites plus normal monthly rent and that is your value.   Depreciating homes have little present or future value and take to much time and money to keep good tenants.     

Carl, so you’re saying to use lot rent and add in rents collected from the POH’s only, in order to derive my value through a cap rate that I desire? And then use this as a price I’d be willing to pay? (I apologize if I am not understanding)Also, what do you think about trying to sell off or do rent to own deals for interested tenants once purchased and then only deal with the land in order to avoid head aches of maintaining the homes? 

Rental property value, park, SFH, apartment, what ever are valued solely on the rental income. Any business is only worth a factor of what it earns.As far as this park is concerned it is a dog. With 12 POHs it will be more trouble than it would ever be worth to own, Maintenance will be a ongoing every day issue and with you not close by to oversee you will be taken to the cleaners my your “tenant manager” and contractors. You should run away from this deal.

Mike–I am saying NO value to POH!!

14 lots x $225 x 12 x .6 x 10 = $226,800 best case in lot value, The homes are probably worth nothing when you subtract the cost to renovate them from what they’re worth. I would not do this deal unless you can increase the rents to more like $295 (not sure how one lot is $150 and one is $300 – what’s the actual market rent?). This deal is very small and the number of POHs is way too high, so it has to have a ton of upside to be worthwhile. What’s the median home price and 2-bedroom rent in this market? What’s the population of the metro? Who are the employers? Give me some sex appeal of why this deal is worth owning.

Frank, Right now, all utilities except electricity are paid by the park. My plan was to install meters and bill back the water & sewer to the tenants. This would be equivalent to raising the rent $54/mo and knocking off approximately $9,000 from my expenses. I am also highly interested in selling the mobile homes to the tenants or getting new tenants that want to do a rent to own or mortgage with me. This would eliminate the maintenance headache and I’d be making the same amount of profit and even a little more if I were to raise the lot rent to $295. The location is in a small town 30 miles south of Bangor, ME (pop. 32,673). The town itself has a population of 2,198 as of 2010 which is a 2.5% increase from 2000. The median gross rent in the town in 2009 was $664. The three 2 bedroom/1 bath houses for sale averaged $81,666. The mean mobile home price in '09 was $51,000. Two 2-bdrm apartments in the town currently up for rent were advertised for $600 & $750. The few 2-bdrm apartments for rent in Bangor were advertised between $635-$770.The average rent at the park for the actual trailers is in the low $600s which doesn’t give me much leeway with rent raises or utility bill-back. It sounds like Carl and Greg are correct about there being no upside…Frank- would you do this deal if the intention was to sell the POHs or is that too much of a gamble?Thanks evryone 

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