Deal Analysis

I’m looking at a park in the Southeast; metro population of 285,000.  There are 28 lots, 23 of which are occupied and purportedly paying $200 per month lot rent.  The broker’s package indicates that other parks in the area have lot rents as low as $150 per month and as high as $250.  There are no park-owned homes.  Water and sewer are provided by the city and billed directly to the tenants.  Utilizing Frank’s valuation method (23 x 200 x .7 x 12 x 10), I arrive at a value of $386,400.  Utilizing a NOI/cap rate approach, I arrive at value in the following manner:     (i)  23 x 200 x 12 = $55,200 gross potential income     (ii) less 5% collections loss of $2760 = $52,440 gross operating income      (iii) assume operating expenses of 40% = (.4 x $52,440) $20,976     (iv) NOI of $31,464At a cap rate of 9%, value is $349,600; at 10%, cap rate is $314,640.According to Sperling’s bestplaces, the metro population (not the city itself; population of the city is actually declining) is growing at a double digit rate, the unemployment rate is 1.5% below national average, and less than 30% of the housing is rented.  On paper, the park looks good to me.  This would be my first park.At a purchase price of $386,400, with 25% down, $289,800 financed at 5.5% over 20 yrs = annual debt service of $23,922, I arrive at a cash-on-cash return of 7.8%.At a purchase price of $314,640, with 25% down, $235,980 financed at 5.5% over 20yrs = annual debt service of $19,479, I arrive at cash-on-cash return of 15.23%.My questions for the forum members would be does this park appear to be one that is worth pursuing, and if so, what is a realistic purchase price?  Thanks in advance for any advice offered.RL

RL:I live in the Raleigh area and travel extensively throughout the SE. I’d be happy to help if you want to PM me.How close are you to the park? Do you feel like you know the area well? Have you called around to confirm the broker’s information about the rents? Are the $250 lot parks in comparable size and condition? What are the ages of the homes? Do you understand the causes of the metro area’s demographic shift?Here in NC, there’s a decent spread in rents, but it is typically an indicator of active vs. passive/mom-and-pop operations. I spoke to an owner in a small market who swore up and down that his 30 years of experience showed he’d never collect more than $150 in lot rent. Five blocks away, I’m looking at a park on city water/sewer (to broker) that has rents of $175 and I can point to four nearby parks with rents in the $185-200 range. There’s a Sun community in the Triad that has lot rents of $340 when everyone else is in the $250-290 range. I wouldn’t underwrite one of those parks at $340 lot rents, but I might bump the rent a little.Will