I’m currently looking at a park with 69 sites. The current owner rents 33 units (all old/junk) and collects lot rent on 27 spaces. The remaining spaces are open lots (5) and owner owned vacant trailers (4). I’m interested in purchasing the park but clueless on valuation. Rents average around $300 and lot rent around $150. Problem is that they want 1.3m. Does this sound right ?
John
All the above sounds absolutely wrong.The price is WAY TO HIGH based on the above stated numbers and the fact there are 33 (junk) park owned homes. You would need to provide a lot more information to get a true price analysis. What state, city, age of park, acreage, utility providers- water, sewer, trash and who pays. The big question today would be are all the tenants in the park going to have a job in a month. Demographics would be crucial.
Rick Ewens
The owner now pays sewer(7,00yr),water(well water so minimul cost), trash($450 month) and taxes(aprox.30,000yr).The property is located in upstate NY on aprox. 7 acres.
Two Ways to Look at this MHP’s value by just looking at the numbers:
Leased LotsLeased Lots Base Rent
32 $150
Rental HomesRental Homes Base Rent
37 $300
Vacancy FactorDecrease Vacancy Factory p/yrRent Increase Yr. 1
$0
REVENUE Year 1
Gross Scheduled Revenues
pads @ avg rent of$150 $57,600
other rental types$300 $133,200
$190,800
Vacancy and Credit Loss -PERCENT 13%
Vacancy and Credit Loss-NUMBER 9
Vacancy and Credit Loss -DOLLAR AMOUNT$24,804
NET MOBILE HOME RENTAL INCOME $165,996
OPERATING EXPENSES
Avg Expenses per Yr50%* $95,400
NET OPERATING INCOME $70,596
ANNUAL DEBT SERVICE -MORTGAGE$92,474
CASH FLOW BEFORE TAXES**-$325,000-$21,878
CASH INVESTMENT $325,000
CAP RATE 5.43%
CASH ON CASH -6.73%
DEBT COVERAGE 0.76
GRM 6.81
AMORTIZATION
PRICE PER PAD 18841
*I found with 40% rental homes my expenses went up from around 35% expense factor with only 2 rental houses to around 50% expense factor.
**Based on 25% down payment balance of $975,000 at 7.25% $7706 payment over 20 years.
60/30 Rule- 12 Cap
Avg Lot Rent X Occup LotsValue
150 60 9000 60 $540,000
X Non-Occupied Lots
150 30 4500 9 $40,500
Less Repairs
Current Value $580,500
Value of Homes0
$580,500
72/36 Rule- 10 Cap
Avg Lot RentX Occup LotsValue
150 72 10800 60 $648,000
X Non-Occupied Lots
150 36 5400 9 $48,600
Less Repairs
Current Value$696,600
i hope this helps some.
Thanks Mike
Great analysis. On site inspection of the above park would probably lower the price even more. I love the power of knowledge this forum provides.
Mike,
Thank you! That was more than just a little help. I can now make an offer with more than “I think your asking too much.”. There is always a better reaction to an educated offer. The advise is more than appreciated and I will let you know how I make out with my purchase offer.
Hi Mike and friends,
Mike, first off - well done. Here is a couple additional comments that might further the review of this potential park acquisition.
The first valuation method provided by Mike was a income valuation. In it the mobile rent was included as additional rent. This is a common but flawed offering method which must be identified for its biases towards the seller. Friends, be very careful when including MH rental income in a cap rate land lease valuation - you will in almost every circumstance lead down a pathway of over paying and financial pain (i.e. the college of real world mistakes).
In the first example provided by Mike, the homes were included (which it should not) and Mike concluded that the park was being offered at a “CAP RATE 5.43%”. Let’s examine what this means: Each MH cash stream was valued at $150 per month (300 total rent - 150 lot rent only = 150 home rent). Mike used a 50% expense assumption which would mean that for every $150 per month collected on the MHome rent, $75 per month, per home, would make it to the bottom line. Annualize this income stream and you get 75x12= 900 net income, per home, per year. Now using the cap rate to value this income stream we get: 900/.0543 = 16,500 per MH.
Would you pay 16,500 per MH for what Johnny B calls “old/junk”?
So what are some other ways of negotiating on MH parks being offered w/ home rentals? Here’s a couple of ideas that have worked well for me and my clients over the years:
-
If it is truly a junk MH then the seller will need to spend money to have it removed and demo’d - BEFORE you close on the park - and this should be part of your offer/contract. This could run between $1500 and ?. If the Seller is not willing to do this prior to closing then you can ask for a credit off the price OF THE LAND community. If there are 5 junkers - try to negotiate a $10,000 or more discount.
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If the MH are occupied and producing income for the seller but you feel they are virtually junk - offer the seller to buy only the MHpark and he/she can keep the Homes as a separate business (which it is). This tactic works the best because it immediately gets the parties talking about the fact that MH land renting is different then MH tin box renting.
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If the homes are being rented and you would like to own the homes - offer wholesale for the homes. Usually during the negotiating and DD part of this dance a seller will “brag” that they bought unit such n such for only $4K and moved it into the park to rent or sell. Use this bragging to your benefit - simply offer the seller wholesale for the homes since that is what you could replace it for if it left the community tomorrow. You will likely not get exactly this price since the bragging will quickly turn into “yea but it costs x dollars to move and set up” but you will also not be foolishly paying $16,500 for a “cap rate MH rental”.
4a. If the MH’s are on notes or lease option then run present value calculations based on the receivables being purchased at a per annum interest rate you feel is worth the risk. Example: Original note of 11,000/12%/60months/222.44 payment only has 3 years which means its PV at face value is about $6541. You, being an smart buyer are not going to take such risk for only 12% return, instead you need 30% in order to buy the note. This means the notes must be discounted to you for a purchase price of $5239.95.
4b. But what if the COLLATERAL behind this note is a JUNKER. Let’s say after inspecting the collateral you think the home is only worth $2K. What should you buy note for? I’d make the same argument that banks make “we can only finance the lessor of appraised value or the contract price”. In this case, this particular note even though the face value of the receivable is currently $6541, I would tell the seller that my bank will only let me buy it for its collateral value which is $2K.
4c. If seller objects to all of the above see #2 above. The seller should keep the notes business and you will buy the park.
Lastly, anytime you start valuing multiple income streams and then making deals with sellers to allow them to keep the home/notes business and you buy the park - always get a long term lease signed with the seller that states the home must stay on the lot and that the seller will be paying the lot rent - not the tenant / buyer (for as long as the seller owns the home or note).
More times then not the seller will not want to keep the “crappy side of the business” - but that is exactly the reason to negotiate from a position of knowledge and power - to convince a seller that including MH rent into their asking price is not going to work for anyone but a green buyer (or bank).
Johnny B - Good luck with your deal and let me know if I can be of any assistance.
Karl
Karl,
Thanks for posting this info.
A very clean and precise way to “cut through the muck” that continually causes MHP investors to overpay for homes in their park. AND tips on how to negotiate around it to boot.
Priceless.
Keith
Post Edited (10-31-08 10:15)
Post Edited (11-01-08 15:35)