Deal Evaluation and How much premium given for seller financing?

I’m currently evaluating the following deal in the Midwest about 2 hours drive from my home:

80 spaces at 90% occupancy or 72 occupied lots @ $230 per month. There is city water and a septic treatment plant, but there is city sewer available about 100 yards away. Nice park with concrete streets and off street parking in a metro of 77K. Homes look newer.

Current NOI is shown to be $135K.

Our standard calculation is: $230 x 72 x 12 x .70 x 10= $1,391,040 at a 10 cap but should the 10 cap rule be used?

Seller financing is available with 15% down, so how should that impact the valuation? I’ve lost a number of deals over the last couple of years (bought one though) because I was trying to buy them them cheaper than others were willing to pay. My gut says I want to buy this at an 11-12 cap but not sure I can with owner financing.

This park is about an hour from a major metro of 1.8 million and unemployment in that metro is 4.3%. The city the park is in has unemployment of 6% and Average home prices are $106K. Avg 2 bedroom apts are $706 per month.

Where would you put the valuation with and without the seller financing and would you do this deal?

You may need to use a 40% expense ratio as opposed to a 30%, as the tenant is not paying for the sewer since it’s septic, and you have to build in some amount of annual money as a reserve to repair the system.

The deal obviously has strengths and the seller financing is a huge plus. If you are looking at making an offer, I would think that a 10% cap rate with 15% down seller carry would be compelling. That being said, I think the target would be $230 x 72 x 12 x .6 x 10 = $1,192,000, with the initial offer of $1,000,000 to get the ball rolling. To get to $1.35 million, you’ll need confidence that the market rents allow for a rent hike day one.

Remember that the proximity to city sewer is great, but you’d have to re-pipe the entire park to connect, as the septic lines go to no common connection point. This also makes me want to pay a little lower so you have a good buffer.

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Thanks Frank, as always your help is greatly appreciated.

To clarify though this park is not on a septic, it’s on treatment plant. so I’m thinking tying into public sewer should be that big of a deal should it?

The value to you of seller financing depends on how bad you need seller financing and what the terms are. It also depends on the sellers motivation to offer financing.
There is no black and white answer to the question.

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I made the trip this weekend to drive through this park. It’s fairly modern with a good mix of vinyl/shingle and metal/metal houses all with peaked roofs so all 90’s and newer. Having been to a couple of boot camps with Frank, I know he likes this kind of mix so that the tenant base isn’t over leveraged with mortgages.

I was surprised that there are only 3 empty lots out of 80, so the data provided must be economic occupancy of 72, but with 5 homes already set up, that’s big plus. 2 of those had for sale signs in the windows.

Ran a test ad yesterday and got about 20 calls so very impressed with the demand in this town and drove through 4 other parks and they were all at 90%+ full.

The street is in bad need of repairs which can be done in sections, but I estimate $50K-$75K or more needed to repair. When a cap ex is needed like this with owner financing is it usually negotiated out of the down payment? Seller may not go for that, especially since there is a broker involved so I might need a get with a bank.

Can the street have potholes repaired for a while, or has that already been done and it still looks like swiss cheese?

There are sections that need to be redone by keywaying and recapping for a better long term solution. Patching the potholes won’t last very long I’m afraid and will leave the sections fairly chewed up.