Deal or no deal? Filling 81 lots

The MHP is in a great location with high demand and good demographics.
City utilities. Master water/sewer.

Price: 720k cash. (NOI and occupancy to low for lenders)
Lot rent: $250 (Market rent is $275-350)
Occupancy: 39 Lots out of 120 spaces.
Expenses: 100k. Most being fixed costs.

Current NOI: 17k
39x250x12= 117k (Gross) - 100k (Exp) = 17k (Net)
Cap rate: 2.4

Potential NOI: 300k
120x300x12= 432k (Gross) - 132k (Exp) = 300k (Net)

Game plan would be to fill 81 lots. Bring rents close to market. Refi and pull cash out in the meantime.

Out of a 100 parks in the surrounding areas, all of them are around 95% plus occupied.
Test ads with homes for sale $799 a month gets around 10 or more calls a day.
Local 2br apartments go for around $900
Local dealers tell me they can usually fill at least 15 homes a year, if a park owner is willing to pay for moving costs and lot rent until it sells. Typical moving and set up costs are around 10-12k per home according to the dealer who floor plans homes in parks.

I would like to work with the 21st Cash program but they say they can not give me any indication if they will work with me or the park until it is in my name.
If they can not work with me, then I plan to work with legacy, local dealers and purchase used homes.

Assuming 10k down to bring in a home though legacy.
I would have to invest 200k for 20 homes.
Purchase Price (720k) Plus Homes (200k) = 920k total investment.
39 Homes +20 Homes = 59 Homes paying lot rent.
59x265x12 =178k
Exp= 100k
So I would have to bring in 20 homes and boost rent by $15 to get to a solid 8.5 cap off of my investment. (Good amount of work involved)

Of course from there I can bring in another 61 homes and raise rent over time.

With Legacy, my 10k investment will most likely be paid back in full in 3.5 years from lot rent.
Using the cash program, I will be receiving full lot rent after 5 years.
Over time if I filled up all 80 lots and paid off my investment in new homes.
I would then be left with 120x300x12=432k x.7 = 302k
This would be a 2.4 cap to a 41 cap.
Or increase my 720k property to around 3M

OR if you look at like 720k for the park, plus 800k for 80 homes financed. Total investment is 1.5m
then it looks more like a 20 cap.
Or increase 1.5m to 3M

Ideal situation would be to work with the cash program. Bring in 30 homes over 1 - 2 years.
Refinance pull money out, then fill the remaining 120 lots.

Seller won’t drop his price. He says the land is worth that alone. His most recent appraisal for the property is around 1.3M. He understands the business of filling lots and the upside in this deal.

Is this deal worth all the effort and capital commitment? Is this a pass or a go? I would rather be coming in at a 8 cap from the start, but the upside is worth something. Is it enough to justify the price?

39 lots x $250 x 12 x .5 = $58,500 in EBITDA, so at $720,000 sales price, the cap rate would be more like 8% and not 2.4% – not sure where the $100,000 of expenses is from but the expense ratio should not exceed 50% on this deal unless you are in an area of unusually high tax rates or water rates. If you raise the rents as you’ve indicated, and perhaps push the water/sewer charges back on the tenants, you might be able to nurse it on up to a 10% cap rate. But there are much bigger problems to worry about.

How are you going to finance this thing? You are (120 x .8) - 39 = 57 occupied lots away from being “stabilized” and therefore bankable. Is the seller going to carry the paper for 10 years? If not, this deal won’t work, as you’ll have to come up with $720,000 of cash, and you’re cash-on-cash return will be pathetic (whatever the cap rate is). On top of that, you’ll be pouring at least $600,000 more of cash into the deal (unless the CASH program pans out), so you’ll have $1.32 million of cash into this before you can even hope to refinance. That’s WAY too much risk, and the numbers are in no way compelling enough for taking that risk.

If, however, the seller will carry the paper with little down for a decade at 5%, and you can make the CASH program work there, then it might work fine. This deal is all about the financing and the home program. But unless you can put those two together, the deal is a non-starter.

For this deal to work, the seller will have to acknowledge that he’s got a piece of junk and is lucky to have you buy it. He will need to bend over backwards on the financing and down payment (you need the down payment to help cover the cost to bring in homes). This is a TOTAL turn around deal (and the hardest type at that). If he thinks he’s got a hot deal here, he’s crazy. These are the type of deals that sit on the market forever unless he’s willing to get more than creative with the carry.

I really appreciate the feedback! This would be a huge turnaround project and your input is incredibly helpful.

I was a little too conservative with the expenses. Although they are unusually high.

Quick summary of expenses:
Taking out travel/offsite management and few other expenses I am still left with 87k
There are some issues going on with water/sewer. Also taxes and water are very high in the city.
Fyi. Tenants pay there own water and sewer. Utilities listed below are parks responsibility.

Tax: 25k
Electric, gas, trash, water and sewer: 18k
Mngmnt: 12k
Snow/lawn: 7k (Lots of area and roads)
Insurance: 3k
R&M: 5k
Cap X: 10k (Lots of trees/Old roads/curbs/Clay Tiles)
Phone/office/fees/advertising/supplies/Misc: 5k

Maybe we are able to lower this by 8k and get expenses down to 80k. I don’t see it getting much lower than that. 117k-80k=37k
37/720 = 5.1Cap

Bank needs to get paid off for 520k. Owner will carry 200k.
This would be mostly a cash deal. I currently have liquidated some assets and have been looking for my next deal.

Unless its non recourse, the level of risk isn’t to far off from getting a loan or buying all cash? I suppose with a bank you can always work out a deal, or short sale if things turn ugly.

My plan would be to get it to around 70% occupancy and then try to pull out all my money through refinancing. At which point I cash in on the cash on cash return.
120x.7=84Lots 84x275x12x.6= 166k
Refi: 60% LTV. 5.5% Loan 1M. (Zero Down)
Debt= 68k
Net=100k Plus 36 more lots to fill and rent is still below market by $25.

I understand there are a LOT of variables at play here. Cash program, refinancing, vacancy, etc.
Im looking at deals every day. Haven’t found the right one yet. This one could work but if you don’t think its that great of a deal and too risky, then I’ll take your advice.

I’ve never seen the park, and it may have the hottest location on earth, so you have to decide if you love it or not. However, here’s how we would look at it ourselves. All you have to do to get a 20% cash-on-cash return on a mobile home park (which is the goal of 99% of all owners) is to buy the park with a 3-point spread between the cap rate and the interest rate on the loan. In this case, if you can borrow at 5% and get a 8% cap rate, here’s the scenario: $720,000 with 20% down = $144,000. At an 8% cap rate, the EBITDA is $58,000. So the Cash-on-cash would be $58,000 - ($576,000 x .05) = $29,200, which is a cash-on-cash yield on your $144,000 of 20%. But to accomplish this, the key is 80% LTV. If you change that to an all-cash deal, by comparison, your cash-on-cash is only 8%, which is a clunker. So, unless you can find a way to get 80% leverage on this deal, you are not putting your money to good use. If you gamble that you can refi down the road, and fail to pull it off, you are stuck with a deal that yields 50% of what you could have had with an easier deal that can be easily financed.

The owner carrying $200,000 is a joke – that’s not seller-financing at all. All you are doing is getting the seller out of his mess, because you’re making him debt free, and he’s probably assuming he’ll never collect the $200,000 anyway, he’s just glad to be free of a park with such poor occupancy.

I guess the bottom line is that I think you can do much better with your capital. But, again, I have not seen this park and there may be something about it so compelling that you’re willing to gamble that much money.

You’re also scaring me with a $25,000 tax bill on a $720,000 park (or might be valued even lower?). That’s a whopping 4% or so of appraised value. I only see tax rates that high around Chicago and it scares off 90% of all buyers. Here’s the problem – that’s not something you can fix. So that park is permanently screwed by paying a tax bill 200% to 400% higher than the rest of America pays. That’s going to keep the park value down significantly (for example, that same park in Missouri would have a tax bill of only $6,000 based on a $600,000 valuation), yet cost you just as much in time, effort and risk. That’s another red flag here.

The property is appraised at 1m on the taxes currently. Thats why its 25k.
I may be able to get that lowered.

Its location is compelling. I have been working full time on acquiring a park for a while now and inventory is limited.

I agree, I would be better off buying an 8 Cap with some upside at 20% LTV. That would be ideal. I have yet to find one, in a decent location that has upside potential. Most are at market rent or above, 100% occupied with no upside. Or its a dog not worth buying at even a 12 cap. I really am holding out for that solid 8 to 15 cap deal.

Thanks for all the input Frank!