The first deal is a 28 lot park with 100% of the lots filled, none are park owned. 100,000 population. It has well water and city sewer. The worst part is the seller will not carry the loan under any circumstances and will not change the price. He’s a bit stubborn to say the least, but the numbers still work. Since it is a smaller park, the only option is local bank financing with about 30% down, recourse, 6%, 20 year am, 5 year balloon.
The second deal is the same price as the first with 30 lots, 100% filled, none park owned, 120,000 population and well water. The worst part is the septic with a $26,000/year pumping bill. The owner prefers to carry the loan to avoid capital gains tax although we have yet to discuss specifics. I feel that I can get better terms on this one with non-recourse and an assumable note.
You didn’t give much detail in the way of financials, but if they were both the same cap rate, I’d have to go with #1 – I would always take city sewer over septic.
Although I understand the aversion, or more appropriately the preference, for city septic I would definatly investigate the cost of septic pumping on park #2 before making a decision.
Why are the pumping costs so high. Does the park only have holding tanks and no septic bed ?
Would it be possible to install a septic bed if there isn’t one now ?
I have a 33 unit park with a septic bed. My tank pumping costs are about $1500 per year.
$26,000/year for pumping seems very high. Are there more costs in that number? For example, some counties in Wisconsin require periodic water testing which can add significant costs.
I’m in agreement that the first deal is more attractive on the surface, without knowing all of the financials. City sewer and a seller carry would be a better deal than private well/septic.
What is more important: Seller carry or City Sewer? I know they are completely different subjects, but if all other metrics are the same except for that 1 difference, which one would you pick?
The $26,000/ year was found in the seller’s tax return for “septic services.” It is possible that they expensed improvements rather than depreciated them.
Neither and both depending on real world, as opposed to hypothetical, situation.
If you have no other source of financing the answer is obvious. If the thought of being responsible for a septic system is beyond your mental capabilities the answer is obvious.
If you are making a business decision based on all of the facts you will discover that a scenario where all other factors are the same will never exist. Your choice of which is more important will likely never be a black and white stand alone decision but simply a minor part of a overall business decision.
I own a park on septic and although it would be nice to be on city sewer you pay a premium for that luxury so that fact alone will unbalance any hypothetical situation.
When I bought my park I had no other form of financing available to me except seller financing so that fact alone determined all my options. I wish it didn’t but in the real world what is most important is seldom something you have total control over.
All other factors being similar my decision would be based solely on the park with the highest potential profit margin. However in any business that calculation includes future unknown variables.
I appreciate your response. I realize that the deal depends on way more than these 2 issues alone. You are correct, no 2 deals are the same and they all have problems. I’ve never had an opportunity to buy on an installment sale nor have I ever been in charge of a private septic system. Of the properties that I’ve owned up to this point, it has all been done the same way with bank financing and city water/sewer.
For the sake of priorities in a mobile home park, what is of higher importance to you? Seller financing with better terms than bank (non-recourse, lower down, long am, fully assumable, etc…) or having the luxury of not operating or worrying about your own sewer system?
I would take city sewer over seller carry. The private sewer will reduce your ability to refinance and also your future buyer pool, not to mention be a constant worry. Not all private sewer is a problem, but if you’re new to the business, city sewer is probably the way to go until you get more advanced.
operating or worrying about your own sewer system?
Assuming returns would be close to the same I would chose the city sewer. If there was a significant difference in the return I would go to whichever provided the higher return. Keeping in mind I have worked with the issues of private septic long enough to accept it as simply part of my business.
I don’t know about the US but up here the vast majority of parks are in rural areas so having septic is standard in the business.