Evaluation on 2 park deal

I’m looking at a deal that involves a two park package deal:

Northeast United States
Both parks are located in the same town (population 8,000)
Part of a metro area with a population of 500,000 (Not near a major US city)
Average 2 bedroom apartment rents at $800

First park located on 40 acres
22 lots, 100% occupied, 21 tenant owned and 1 park owned
Public sewer, private well
Tenants pay the sewer
Lots rents are $155 (Market lot rent is $250)

2nd park located on 4 acres
38 lots, 34 occupied, 33 tenant owned and 1 park owned
Great location in nice area of town
Old trailers (assuming 70’s models), small and crowded "trailer park"
No offstreet parking
Public water and sewer
Park pays water, sewer and trash
Lot rents (31 are rented at $175, 2 are rented at $225 and the rental is $440) Market lot rent is $250

Owners want $775,000 and are willing to cover half the down payment but the terms have not yet been discussed. They are representing a 9.5% cap which I don’t believe to be accurate at $775,000. They are showing a 40% expense ratio for the 22 lot park and 37% expense ratio for the 38 lot park. My valuation tells me the park is worth around $700,000.

I can’t see getting this deal at a 10 cap so I will have to raise rents quickly to get the return I need. I’m not a huge fan of the private well on the small park but my bigger concern is the 38 lot park is old and crowded. I’m concerned I will have a difficult time replacing these old trailers over time. The lots on the perimeter have a bit more room but the trailers in the middle of the park are very small (I haven’t measure them yet) and really no room to increase the size so I’m pretty much stuck with the trailer size that is already there.

Thoughts or ideas?

Thank you,

Another lever to negotiate with the Seller is to calculate the amount property taxes will increase if you pay 775K for it. This can be tens of thousands of dollars and a good way to show how the expenses would be higher than what they have on their operating statement.

For the one park you could begin to sub-meter the water and pass along the water / sewer charges accordingly - and also allocate a trash fee - to get on your way to a 20% CAP.

A 40 acre park seems big for 22 lots - is there a way to carve off the excess for either additional lots, or to just sell it and lower your loan? You should be okay with the water well if you have it checked out by a couple qualified contractors not used by the park today. You could install sub-meters on the homes and pass well water charges to the tenants that match the nearest city rates so you can cover the expenses and maintenance of it.

So long as the town economy is strong seems like could be an okay deal. I don’t know the northeast well, so maybe you already know but I would check the legal items for rent controls and passing back expenses to the tenants. Good luck.

With the park paying water/sewer/trash on the second park, i doubt this is a 37% expense ratio.

Lets run a few numbers here on this:

1st Park:
2215512=$39,060 rev
With well and passed through sewer, we would evaluate this at a 45% expense ratio… call this conservative, but you’re time is worth something so a hefty offsite management expense is warranted here. Anyways, I’m looking at this as an NOI of around $21,500. Purchase price $215,000 with maybe an extra $5-$10K on the POH. Obviously, there is a ton of vacant land here too. I know nothing about the vacant land in this deal, but the physical park income stream is worth $225k tops here.

2nd park:
34*$175*12=$71,400 rev
Scary thing about this is that the park pays the water/sewer. When your lot rents are this low, you are almost forced to pass this through to keep from negatively cash flowing with a mortgage. Anyways, I would view this one at a 60% expense ratio. Or, being worth $285,600. I say this because, a $50 water bill and a $14 trash bill per resident/per month won’t be abnormal and that alone is worth nearly 37% of your rev. A 40% expense ratio doesn’t work here.

The redeeming thing in this is that your 2BRs are $800. I’m on-site doing diligence on a park where the 2br apartment rent is $818. The lot rent in our park is $280 and the market is at $310. Your 2BR apartment rents indicate that your market rent should be north of $250 on a lot to me. Just my opinion, but you need to do a comprehensive market study to figure that out. Assuming that it should be at $250+ with everything passed through, then your upside numbers may look like this:

56*$250*12=$168,000 rev

At a 40% exp ratio, your package has a value of $1,060,000 on a 10CAP. That equates to an upside to a 13CAP assuming a $775,000 purchase.

I would recommend you push this seller lower than $775k, but you really need to look at this as what it can be more than what it is. Buying at a 10 and pushing to an 11 < than buying at a 7 and pushing to an easy 13. Bottom line, you need to focus your attention on what the potential revenue could be on this deal and work backwards to a price that makes sense for the troubles you’ll incur in orchestrating the event.

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Thanks for the replies, fellas. You both make really good points and when I evaluate my goals, I just don’t think this park fits the bill…at least not for $775K. I agree the expense numbers are way off, the owners aren’t interested in negotiating and I’m not interested in buying an 8 cap at this point. I don’t think the juice is worth the squeeze on this one. Someone will buy it but it won’t be me.

I appreciate the feedback.