Deal Valuation Opinions Please

Hi Everyone!I’m working directly with a seller on a 34 space park in a small town with a population of 2400, but just 45 minutes to the center of a major metro area of over 2 million with tons of employment within 25-30 minutes.  Expenses for this park are ridiculously small and I’ve verified income/expenses against the last 3 years tax returns. 34 space community with 31 lots occupied @ $200 per month. Last rent increase was 6 years ago.  All city utilities are direct billed to the tenants by the city.Streets are maintained by city.I see no deferred maintenance. Expenses are less than $3300 per year.  My taxes may go up quite a bit unless I’m able to work with the assessor to keep the rate of taxation on par with the current owner. Park has had very little turnover in homes, some are getting some age on them.  Several private investors own multiple homes and are renting them out of which several are vacant but the investors are still paying the rents regardless and the owner says they have been great payers.  One investor has one vacant lot we wants to put another rental home on which would bring the vacant lots down to 2.This is the largest park in this small town, the rest are a few 6-12 space type parks.I know the standard formula is 31 x 200 x 12 x .7 x 10 = $520,800 for a 10 cap sales price based on 30% expenses but at present this park’s expenses are running at less than 4.5 % of gross income, not the standard 30%.  Is my thinking correct at the following valuation? 31 x 200 x 12 x .955 x 10 = $710,520 ?  

Ernest:The expenses may be “true” in the sense that they are as represented. My question is whether you would incur the same expenses when you own the park. For example, if the owner has a grinder she knows how to use, would you be able to do the same? Does the owner do his own mowing/landscaping/tree trimming – would you? If you can’t reduce the real estate taxes (if they are reset by the sale) what would your expense ratio look like? Does the local economy support raising rents? There’s a good story on this park so far, but I’d push for a higher cap rate. There are still headaches to come, so make sure that your price compensates you for them. 31 x 200 x 12 = $74,400 net rents so your expected NOI would be $52-66,000 (10-30% expense ratio). Is that enough?Will

Good points.  The only thing the owner did was collect rents. Everything else was contracted out so I think I’m pretty safe there.On current numbers based on the offer I have an 11 cap.  Since rents have not been increased in 6 years I think I could get away with $25 without to much hoopla.  There are not many communities in this area to gauge market rents with but I found one within 10 miles charging $250 for current residents and $300 for new residents (including sewage) and one at $200 not including anything. Push out 20-30 miles and they are all near $275-300.If all goes well with the assessors office I should be at around at a 13-14 cap after filling the 2 lots @ $15K per home and pushing rents up by $25.

I am assuming it is city water. Do the tenants pay water directly to utilities or are they back billed from management?

Yes, all utilities are billed direct to the tenants by the city. The utilities are cheap too. Water usage would run an avg family $10 per month (3000 gallons) and sewage is calculated at 3x the water usage. So $40 on avg total.  I know parks in my area billing back tenants using RUBS method (ratio utility billing system) at over $100 per month.

Looks like there is a lot a lot of potential for rent increase sincethe utilities are so efficient, provided the market will bare.
have you run comps on the lot rent of surrounding, albeit smaller parks?
when you say several investors own homes, do you know the exact number of investeors, and the number each owns? Curious what percentage are investor owned. In the event they decided to move to a different lot, or strong arm you for a reduced rate in the future. Not saying that it will happen, but good to know your  risk going in.

It does not matter what the expenses really are to the seller, but what the banks and appraisers use as their standard expense formula. Nobody is going to sign off on less than maybe 25% expense ratio (and I don’t think this park is going to get even that lofty a constant). Your average bank is going to include ample costs for manager, R&M, taxes, reserves, management fee, etc. Here would be my estimate of the real costs of this park:Revenue = $200 x31 x 12 = $74,400Expenses:Property Tax  $5,000Insurance:  $3,000Manager:  $7,000Reserves:  $1,500Management Fee:  $3,700Mowing:  $3,000Total so far… $23,200 – and I’m not even finished yetYou are already at 30%!If you follow proper due diligence, you will soon find that the expense ratio of this park is probably more like 40%. 

Thanks for your input Frank.  The property taxes and the insurance (I got an estimate from Kurt Kelly) should be less than half what you are projecting but you’ve brought up some things like reserves and management fees I had not considered. I’ve got new concerns now that I’ve sat down with the owner and went through the history of each tenant/lot and have found that the following scenario:15 Lots are owner occupied (a few sold on contract by others).7 Homes are owned by private investors and rented out.8 Homes are empty and in a state of rehab or not being lived in but rents are being paid on the lots. I find this to be bizarre and to be short lived.1 Junker home needs to be removed.3 Lots are vacant but one investor is bringing in a home to rent.So, what seemed to be a decent park on the surface is going to require quite a bit of work and is hanging by a thread.  Here is what I’m seeing that needs to be done and factored into my offer:1. If I make it to due diligence meet with each owner of the 8 empty homes and evaluate the condition of each and make a deal to buy them or have them signed over to me and put together estimates for rehabbing or removal or what their plan is to rehab and rent and give them a time to have it completed so the park doesn’t look like a ghost town.2. Estimate the cost to fill the empty lots.  I would like to do that with new homes to raise the image and attract better tenants.  Once pulling out the 1 junker that would leave me with 3 new or late model vinyl shingled homes to bring in at a cost of about $45-$65KHow would you value the vacant investor owned lots?  I know one investor is planning on bringing in one home to fill one lot so he apparently has the desire to get his rehabbed and rented.I’m having a hard time placing a value on this park.  Tell me if this is reasonable:Costs to turn around estimates:Take 1 home to dump or destroy: $2000Purchase 6 vacant homes from investor tenants: $8000Rehab 6 vacant homes: $36,000Total: $46,000$200 x31 x 12 = $74,400 x .7 x 10= $520,800 -$46,000= $474,800 Offer Price.Actually this still seems too high. The seller was stuck at $625K firm, but when I uncovered the real scenario he informed me to make him an offer.  

I would be concerned about the following:-  7 MHs - Investor Owned:  Rented Out-  8 MHs - Vacant:  Rehabbing & Paying Lot Rent-  15 MHs - Owner Occupied:  Few On Contract By OthersIt appears that you have over half (some of the Owner Occupied…if on contract, the MH Titles are probably in the Investors’ Names) of your Mobile Homes owned by Investors.  Investors’ primary objective are to get a ‘living body’ in their Mobile Home who pays the Investor.  This ‘living body’ might NOT necessarily be the best Tenant for your Mobile Home Park.  This ‘bad’ Tenant will then run your ‘good’ Tenants away.My Husband and I own and manage 2 MHPs.  We have found the following in our MHPs:-  Investors - Lonnie Dealers:  Puts in bad Tenants that ‘pay’ the Lonnie Dealer but not necessarily ‘pays’ the MHP Owner.  Not only does the Lonnie Dealer Tenant cause issues, so does the Lonnie Dealer.-  Family Members - Who Own Mobile Homes - & Have Their Family Members Live There:  Love, love, love these peeps.  The Family Member will own the Mobile Home and make sure that the Lot Rent is paid every month.  They normally pay the Lot Rent early.  They care about their Family Member, their Mobile Home and your Mobile Home Park.I would walk from this deal and search for a Mobile Home Park with ‘real’ Owner Occupied Tenants (the Tenant’s Names on the MH Title) and NO Investors.Look for some Lot Rent Only Parks as they would be a good starting point.Our first MHP was ALL Owner Occupied and was easy breezy.  Our second MHP was/is a Turn Around with a mix of Owner Occupied and Park Owned Homes.  We gave (for $5 each) 2 Park Owned Homes to a Lonnie Dealer.  The Lonnie Dealer promised the world but ended up being a nightmare.  Initially, he promised to pay the Lot Rents.  However, when the Lot Rent had not been paid for two months and we asked him to pay it, he became very defiant.  He bounced a check and then said that ‘he was not paying Late Fees because he was not the Tenant’.  We are in process of ending our business relationship with this Lonnie Dealer.We are now focusing our efforts on fixing up the Park Owned Homes and finding the Tenants for them.We wish you the very best!

Kristin, I have those same concerns as you.  Crazy enough these amateur investors have been paying the rent but that would certainly end before long, especially if I raise the rents.  It’s definitely a turn around project at this stage but within 30 minutes of me. All tenants are screened by the current park owner.I would like to own it due to it’s proximity within my metro area, that is if I can buy it with ample upside. 

I totally understand the draw of a MHP 30 minutes from your home.I love the fact that we are able to drive 25 minutes to one of our MHPs.  To be physically close to our MHP is a huge advantage for us.Some Investors are ‘Good’ and it sounds like you have some in the MHP that you are looking at. We had an Investor who owned a MH in our Park.  Unfortunately, the Investor allowed someone access to his MH.  This person then allowed the City Inspector into the MH.  The City Inspector condemned the MH.Even though the City Inspector condemned the MH the Investor continued to pay Lot Rent for approximately 5 months while the MH sat vacant.  Approximately one week ago the Investor paid to have the MH demolished along with paying for a debris container.  Now the Lot that the Investor’s MH sat on is all clean and spiffy…ready for a new MH.Thus, if you have ‘Good’ Investors, they will continue to pay you even if their MH is vacant.We wish you the very best!