I have a 92 space park with 58 occupied lots (24 of which are park owned homes), leaving 33 vacant pads and 1 vacant park owned home. Average lot rent $215 a month. The asking price seems ridiculous to me at $1.6 million, but I have some sources who say he is looking to get around 800k-1million (but his agents tell me otherwise so who knows). I have run all sorts of numbers and proformas but I have two main problems in this evaluation.1. The current owner does not keep separate expenses for the park owned homes, and all of the income is lumped together so it appears that expenses are very high (because it includes purchase and rehab expenses for homes). They are also trying to capitalize all income including from park owned homes. So their income and asking price is inflated due to this. I have simply estimated basic expenses on the proforma for the lots, such as $15,000 for onsite management and no owners salary (is this reasonable?) I’m still coming in at 60% expenses using the numbers I was provided that I can separate from park owned homes. Tenants pay all utilities except trash. It is a newer park built in the mid 80’s and has updated electric and pvc water and sewer.2. How much do I pay for these personal property park owned homes? I work for the Appraisers Office and pulled the values we have on them at $243,700. This seems high and I figured either way I wouldn’t pay more than 75% of that which puts it at $180,000 or so. There are 24 3 BR and 1 2BR units with an AV age of 1994. The appraisers office uses a 10.96 cap rate for valuations, the seller is using a 9.28%. Any help on valuation would be much appreciated. I am coming up with $700,000-$800,000 due to the high expenses and I would be willing to reevaluate during due diligence if I am provided more detailed information on expenses. I realize the 70 rule places it at closer to $900k, then I assume you add the value for the homes, but would you not adjust that rule when expenses seem high and somewhat unexplained? Thanks for any help and let me know if anyone needs additional information.
58 x $215 x 12 x .6 x 10 = $897,840 at a 10% cap rate for the lots. On the home side, probably $5,000 x 33 = $165,000 at the most. So the whole deal – lots and homes – are probably worth less than $1 million.I can tell you without even looking at it, that the difference in the values between the $1 million that the park is really worth, and the $1.6 million the seller wants, is the “capping” of the park-owned home rent. That “plug” number is 33 x $300 x .8 x 10 = $792,000. Subtract the $165,000 that we already gave for the homes, and you get $627,000 – the exact amount you are off.Why can’t you cap the park-owned home rent? Well, you can, but the cap rate would have to be – not the 10% the lots are worth – but more like 50%, more like businesses are bought and sold. The homes are not real property. They are not worthy of a 10% cap rate or anything close to that. Business brokers use 50% cap rates all the time in valuing non-real estate related businesses.Can you convince the seller that the homes are worth a fraction of what they think they are? Probably not. The MARKET will have to convince them. When every buyer and bank says they’re crazy, it may eventually soak in. But in the interim, they are going to be confident that you are the crazy one. Only time will normally convince them that capping park-owned home rent is not allowed.
Thanks Frank. 33 is the number of vacant pads, there are 25 park owned homes. So at $5000x25 we are at $125,000 for the homes. If we cap it at 10% for the lots we are looking at $897,840+125,000 for slightly over a million. I would like to present an offer for $900,000 (using closer to 11% cap that my business partners prefer). Does this seem like a lowball offer or fair considering it is the first offer? I don’t want to insult this guy and ruin a potential deal. But I also know we need some room to negotiate. Based on the expenses they have shown it appears they are over 40% so I would think it is still a fair offer. Quick Question, any estimate for mowing expenses on something like this? He currently does it himself and I figured I needed to include something for that.Also, what are your thoughts on building some kind of storage on some of the vacant pad sites? Garage space or self storage?
You’re probably going to insult him no matter what you offer – since the value is so much lower than the asking price – but you have to start somewhere and $900,000 is as good as any. You can’t ruin the deal as, based on his current asking price, it’s no deal at all. The seller is either going to already know that his asking price is stupid (someone we call “fishing for idiots”) or truly believes it’s fair, in which you’ll have to wait around until 100 other people tell him he’s crazy.You’ll need to get three bids on the mowing during due diligence. We pay around $10 per vacant lot to mow it, plus the common areas, so you should be able to ballpark guess it.Don’t build self-storage on the vacant pads. Just leave them vacant or rent them to the neighboring mobile home tenant as an extra big yard (it saves you the mowing). Self-storage has never been a big success in mobile home parks. We only get around $50 per month on a 10’x10’, and that’s not going to justify new construction (we inherit these self-storage units).
Thanks for the great info. I will be putting something together this week and we will see how it goes. Do you recommend trying to set up a personal meeting with owner to present the offer or just submit it to the agents?
Depends. Submit it to the agents, but only after you have talked to them about what it will take to make a deal (lowest price/seller carry/etc.) Brokers will sell the park owner down the river just to make a commission, so if you tell them you really want to buy the park but want to know the minimum the seller will accept, even thought the seller told the broker he’d take $500,000 but to never tell anyone that, he’ll immediately tell you $500,000. The broker is often the best tool you have.However, if the broker refuses to submit it, or says it’s impossible, then give it a shot yourself. A broker with a bad attitude is the worst tool you have.
I will see what I can get out of them. I will update on the board when I hear back for anyone who is interested.
Frank, I’m evaluating a park like RD and am coming from SFR / apartment valuation. So I need some reading or refereences on your assertion that park owned rental income does not add into the NOI that is used for cap rate calc of the asking price. To me each park owned is like a SFR or an apartment building which does get valued on cap rate. Why not include park owned rental income in the NOI used for cap rate? Doesn’t make sense to me. I’m glad to have a way to give a lower offer price but…
What are typical cap rates on SFR or apartment buildings? (that’s a real question, please answer if you know!) Not 10% I’m sure. That’s why you can’t cap the home rental income (at least not at the same rate as the park income).Brandon@Sandell
Yes larger class B+ apartments are sub 8%, class A has been bid down to 6% even lower if foreign bought, class B SFR here in Atlanta is still 12% or better. We are doing rent to own for double wides on land and getting 25% cap. Multi family is primarily door rent driven valuation.In this deals case the rentals are getting $400/mo at 50% expense ratio thats $2400 NOI and 50% cap rate that’s $4800. Plus land value I would imagine.I still don’t see the logic of giving so little value to rent income.