How do you explain to mom and/or pop that their rental income is of no value? Pop died a few years ago, mom is in her 70’s and is ready to sell her 70 space park that includes 11 park owned homes. The rent she is collecting is from these homes grosses $65k after deducting lot rent. Seems to have a very stable customer base, with only 1 or 2 turnover annually.
She wants me to make an offer. She has 64 of her 70 lots currently occupied at an average of about $160/mo. City water, sewer and streets, all paid by tenant. I know that when I give her an offer based on the lot rent alone, I will have one angry lady on my hands as she tells me she “makes” $200k per year with the park (roughly lot rent + home rent). Her “makes” in reality is total revenue.
I understand the math, but if I were in her shoes, and did a quick google search, it will be inconclusive. Not to mention, nearly every listed MHP you run across on the internet includes the rental income as part of the valuation. That’s strong evidence for this “mom” to balk at my offer.
This part is covered pretty well in the home study course. The way it’s explained is great, just ask her for the real numbers then show her where she is way off. What are your taxes? Utilities? Trash? Insurance?, etc. Then just use HER numbers then she can’t dispute the final value number.
As to the POH, what worked for me in my case was just pointing out that the park would never qualify for financing with the homes. Then, since I’m a licensed home inspector I inspected the homes (just a quickie inspection) I put together a repair estimate for each home. The kicker was I used HER maintenance guy for the repair estimates, so she couldn’t really dispute them.
That’s what worked for me, as they say, your mileage may vary.
So the POH’s are renting for $650 a month? That’s a $490 a month delta for the home rent? If that’s correct then this might be one of those cases where it may be profitable to rent the homes - not that I’d want to do that personally.
I’m new to mobile home parks, but a long time vet of real estate investing. I’d be interested in the opinion of others more experienced.
[quote=“isaac49, post:2, topic:11422”]
Try offering her to keep the park owned homes and income therefrom and just sell you the land.
[/quote] I like this idea, but still wonder how best to respond to her objection.
[quote=“Coach62, post:3, topic:11422”]
As to the POH, what worked for me in my case was just pointing out that the park would never qualify for financing with the homes.
[/quote] I like this too, but what if she says she will owner finance? I prefer her to carry paper, but without the rental income as part of the valuation.
You can’t get leverage for the homes so you can’t evaluate the POHs on a 10CAP, thats for sure. A properly leveraged 10CAP generally gets you between a 16-20 CoC. Therefore, your CAP rate (unleveraged) needs to be 16-20 to get the same return. (maybe more, because there is also no principal reduction unleveraged) Also, the income stream from POHs is less stable so you are now likely going to need 25-30 to offset this instability. Now, lets do the evaluation on these “assets” un-leveraged using a 50% expense ratio.
$490/2= $245*12= $2,940/30CAP= $9,800 per home.
That’s one way to do it and I’ve had good luck explaining it that way to sellers and brokers. Usually my delta isn’t $490 so my price generally comes in way less per home on the parks we most often look at.
Second thing I’d like to point out is that most brokers have never owned a park so they need to be educated as well. There is likely a reason why their listing is still sitting on the market with POHs at a 9-10CAP.
I am also going to discuss with my banker. Perhaps a letter from the president of the bank stating they loan only on the real estate would be another help? I want something tangible I can show her (and her 2 sons that will most likely have some say) that comes from someone other than a biased buyer.
You might encourage a daughter or a son to help so she can better under stand your desire to pay a reasonable price and take good care of the property that they spent a lifetime to develop. In the process you might have a local banker the seller is comfortable with help understand the process that would be best for both buyer and seller. The dance might take some time but it take two to make a deal–be a good partner.
I’ve never seen a park in which you can rent homes for $650 per month with lot rent of $160. A market weak enough that lot rent is only $160 is rarely strong enough to get $650 for the homes. The average lot rent in the U.S. is $275 per month, and the average home rent is around $550 – which is a spread of roughly 1/2 of what you’re describing. Is the market lot rent really that low, and have you run comps on the homes to see that $650 is the norm? Your lot rent is what you get in a rural area, but the home rent is a major metro rate. Is it possible that you can raise the lot rents substantially, and that might bridge the gap if you like the deal in every other aspect.
[quote=“frankrolfe, post:11, topic:11422”]
I’ve never seen a park in which you can rent homes for $650 per month with lot rent of $160
[/quote]The comps do seem to be less than that. She’s getting 950 and 850 on a couple doublewides and 600 - 650 on the remainder. It seems out of whack to me too. I’m not sure how she’s getting that much rent if, she in fact, really is. I think the avg is about what you stated, $500 or so.
The park is located just outside a metro of about 300,000, in one of your least favorite areas Frank, Northwest LA , but is really pleasant to drive through. She apparently runs a tight ship. She added 8 spaces last year and has had 4 owners already bring in new trailers. She told me she has had turned down 3-4 tenants in the last year or two that were moving and wanted to sell their trailer to someone and made them pull their trailer out because she didn’t like who they wanted to sell to??? Very contrary to what I’ve learned from the home study course.
Lot rents are below market by about $25 - $35 appears
, but is really pleasant to drive through. She apparently runs a tight ship. She added 8 spaces last year and has had 4 owners already bring in new trailers. She told me she has had turned down 3-4 tenants in the last year or two that were moving and wanted to sell their trailer to someone and made them pull their trailer out because she didn’t like who they wanted to sell to??? Very contrary to what I’ve learned from the home study course.