Due Diligence - issues uncovered

Hi Folks,I am in the midst of due diligence for my first deal, and I have uncovered issues with the park. The biggest issue is that the 1040 does not match up to the P&L projections the owner provided. There are significant rents which are in arrears from the tenants, and the owner admitted he’s had significant issues collecting the rent, so the revenues have significant shortfalls compared to the projections (off by about 1/3 - 1/2). It’s not that the tenants aren’t there, but more that they don’t pay!Furthermore, while the utilities are sub-metered and charged back to the tenants, the reality is that they don’t always pay, which means the park is liable for the charges. Basically put, either the park is mismanaged, or just has terrible tenants with no redeeming qualities. I’ve been to the park and it looks ok, plus the utilities are in decent shape…but it’s going to be a hassle to evict these tenants who don’t pay, so I feel I should be paying a price for the park commensurate with this.I figure I have one of two options: Negotiate a price of $350K (down from $475K, and in my view, the “actual” value of the park) or walk. What do you guys think?I’ve attached the original assessment of the park below. 1. 40 lot park, with 29 occupied pads (all tenant owned) and 1 occupied SFR.2. Average monthly rent of $240 per pad (plus $400 per month for the house).3. Tenants pay all utilities (city connected); the Park is on the hook to the utilities, but these are all metered and charged back to tenants on a monthly to the tenants4. Road is paved, but privately owned by the Park5. On-site manager who gets free rent in exchange for keeping an eye on things 6. All-age family park, with all but one of the pads as singlewide 16x807. Located near Akron, Ohio in an area with decent economic prospects8. Mostly long-term tenants in place9. No seller financingI don’t really live near Ohio, so managing it myself (even to collect rents) is a no-go proposition. I figure the value of the park is as follows: 28 pads (excluding free manager pad) x $240 x 70 = $470,4001 House x $400 per month x 25 months = $10,000Total value = $480,400The above analysis excludes any rent increase (comps are $275 in the area, so I have room to increase the rent $20-30 per month), and I put it under contract for $475K (60 days DD & Financing, with agreement from seller to extend 30 days financing if I have a letter from the lender that the loan process is moving forward). I don’t think it was a steal, but this is absolutely the lowest price the seller would take (barring an all-cash offer), and it’s already down almost 20% from his initial asking price, I think it’s a fair deal (not a bargain), but the park seems in decent condition and well-managed, so I’m willing to pay a slight premium for that. 

What is the NOI after you rebuilt his actual numbers?

So in five years what do you believe it could sell for? It is all about the next buyer–why should he want the property. and HOW have you raised the value??? In the mean time as Charles has mentioned what is the ACTUAL CASH FLOW–or how much profit goes in your pocket for your troubles like trying to keep people paying on time IF they really DO NOT have the money and throwing out deadbeats just changes your NOI. I have never bought a park with less than 95% occupancy and presently with over 200 sites NO LATE PAYMENTS and am an owner-operator. Be careful with the rust belt the economy can be fickle.

From what I have seen in the cash flows, I estimate that he’s consistently renting about 21 lots (out of 40 available) for $240 each, plus 1 stick-built house for $400 per month (less than market rate, but tenant has been there for years). On top of this, he’s spending about $13K a year for utility charges related to deadbeats.As of August this year, he has only collected gross rents (including the utilities for which cash was received) of $47K, and with about $8K of utility chargebacks, this means a rental run-rate of $58K (47 - 8, pro-rated for 12 months) - which is well below the projections I originally had.Overall, the I view the value of the park as 21 x $240 x $70 = $352,800, plus $10,000 for the house.I’m going to tell him tomorrow that the offer is dropping to $350,000 from $475,000, and if he’s not willing to take it (which he likely won’t), then I am going to walk and get my back my escrow deposit. He can try this dance with someone else, but it’s my first park and I don’t need to overpay for someone else’s bad mistake (apparently he paid over $500K for the park).

That’s the right decision.

Steve, I agree with both you and Frank to:1.  Offer - Drop To $350,0002.  Offer - Cancel & Get Back Earnest Money (If They Are Not Willing To Drop Price)As a Real Estate Broker/Agent I find that with most houses the Buyers bring a lot of emotion to the table.  Thus, they are willing to overpay for a house simply because they ‘really want it’.However, with Mobile Home Parks the valuation that Frank & Dave recommend is just cut and dry.  There is no emotion in the equation.  Just because there are mobile homes in the MHP does not mean that they are adding to your profit.  In this instance they are actually adding to your loss side as you would be responsible for the water that they use and do not pay for.You are correct to re-negotiate the price based on the ‘actual/real’ numbers or walk.As a Realtor my Client put a contract on a MHP that said that all the 14 Lots (14 Lots Total…small MHP) were filled.  Well, they were filled with Mobile Homes, but only 7 Mobile Homes were filled with people who were living there and paying rent.  The contract price was based on 14 Lot Payments.  However, in reality the MHP was only half full.  When we pulled the contract, the other Realtor was all upset and said that ‘all your Client has to do is find Tenants’.  My response was 'if it is just that easy to find Tenants then why didn’t the current owner do this?'In business you just have to have protocols and guidelines and be willing to stick by them.It sounds like you are willing to do this.  Good for you!We wish you the very best!

Thanks everyone.Just as an update, I have informed the seller that I am walking away from the purchase agreement. He said that he has a back-up offer slightly above my $475K offer. That’s fully possible (it looks good on paper, until you start digging into the details behind the pro-forma numbers), but I honestly think the real value of the property is no more than $350K. I know the seller is trying to offload a hot potato, and if someone else is willing to pay up for it, so be it.

Steve, please if this is your FIRST park buy with at least a 90% pay

ing occupancy since if needing a manager filling the sites can be a night mare. Actually trying some more trial offers before being the owner might be a very educational experience. IF you bug trouble it will own you.

Every seller says they have a back-up offer. He actually doesn’t. In fact, if he really had such an offer – and one higher than yours – he would certainly have never bothered to tell you that, and merely said “OK, no problem” and quietly called the other buyer and put it under contract. My personal bet is that he has no other offers and will probably come back to you within 30 days or less and try to get you to buy it at a price lower than $475 but higher than your new offer.My daughter was looking at homecoming dresses recently and the saleswoman tried to put the hard sell on her and said “if you don’t buy this dress, I have another customer who is buying it at 10 in the morning”. I told my daughter that the lady was making it up and that she’d be calling us around 11 AM telling us that the other customer had changed their mind, and the dress was still on the market. I was wrong – she called by 10:30 with the same story. So I told her “I’m sorry, but my daughter had assumed that the dress was already sold and lost interest in it” at which point she offered the dress to her at 20% less. Unfortunately, she really didn’t want it. The point is that the old “I have another offer” is the oldest game in the book.

Yeah, he was likely pulling my chain, but I don’t care. Best of luck to the seller. I’m not going to subject myself to psychological games. If I miss out on the property, so be it - something else will come along. The biggest issue is that I know what this guy paid for the park, probably not having done enough due diligence, and I’m sure he doesn’t want to absorb the loss.I’ve done my evaluation, and I think $350K for the park is a fair price. I’m not going to budge from that price (unless he offers me some kind of crazy deal, like no money down and he finances it). We’ll see what happens, but I’m already looking ahead. 

I have a basic question to ask Frank or other seasoned parker owners in this forum.  I see two formulas that people used in this forum to calculate park value.  Let’s use SteveF’s case for instance:Rented Lot: 21, Lot Rent: $240. here are two estimated values of the park he was interested in:1) 2124070=$352,8002) 2124012*7=$423,360There is 20% difference, so which one is correct?  I know formula 1) is in the study course but formula 2) has been used in this forum quite often.  Please advise.  

Never mind, I think I got it.  One yields @12% cap and the other yields @10% cap.  :-)Shan

We developed the short-form formula to represent a 12% cap rate, which is what we offer sellers. The long-form formula is a more accurate portrayal to 10% cap rate. We offer 12% cap rates because the seller normally will negotiate back at an 8% cap rate, and we meet in the middle at 10%. If you offer 10% cap rates, you will always end up at 9% or lower due to the “bartering” nature of buyer/seller politics.

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Got it.  Thanks, Frank.