Help with Deal Analysis

I’m looking at a deal in the Southeast, metro population of 145,000, which has grown at a rate of over 11% in last 15 years. There are 84 lots, 72 occupied with an average lot rent of $185. Water/sewer on public, but submetered to the lots. Eighty POH’s are part of the deal. The broker indicates all POH’s are on a rent to own program, with the total balance owed on the eighty homes being $987,989. How best to calculate value? Here is how I have done it:

  1. 72 x 185 x 70 = $932,400; or should the multiple be 60 since water/sewer are submetered, in which case: 72 x 185 x 60 = $799,200.

  2. The tricky part is the value of the homes. I believe Frank suggests placing a value of 65% to 70% on the balance owed on the homes, which would be $987,989 x .65 = $642,193.

What am I missing? Thoughts and advice would be much appreciated.


How can there be 72 occupied lots with 80 POH all on RTO?

Brandon - 8 of the POH’s appear to be vacant.

So when you say all 80 are on RTO, you mean that the current owner owes a lender on 80 homes, of which 72 have occupants paying rent. Is that right?

I also calculate 4 vacant lots. Is that right?

What year and size are the homes?

What is the home rent (including or excluding the lot rent) and what are comp rents for 2 and 3 br apartments?

What are local comp lot (lot-only) rents?

What are local comp occupancies?

The answers to these questions will fill in a lot of blanks.

.7 is the correct multiplier imho. The hard part is figuring the value of the notes, personally .6 is the highest I’d go if that. Remember that after that income goes away your debt service is the same.

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Yes, you appear correct, the current owners has 80 homes. Of which, the material provided to me indicates 77 are financed with a bank.
Yes, I calculate 4 vacancies
Homes are from 80s & 90s; most appear to be either 14 x 70 or 16 x 80.
Home rent averages $215.
I do not know comp lot rent or local comp. occupancies. I just received the brokers package yesterday.

Thank you and Coach62 for your input.

So according to F&D’s formula (at 12% cap rate) you would get

72 (lots) x $185 (rent per month) x 12 (months) x .7 (profit margin) / 12% (CAP rate) = 70 x monthly gross or $932,400 as you calculated.

However, that formula could be tweaked for this park. For example, you are not going to see a 30% expense ratio (70% profit margin) on such low lot rents.

The homes appear to be encumbered at $12,500 each (approximately). Does the deal include the homes? If you pay $0 for them you’ll still be buying them for $12,500 each (on credit at whatever terms).

Are they worth $12,500 each? Possibly. It’s going to be hard to stay afloat renting them at $215 per month, though.

If this is your first deal, think carefully about how hard it is to manage 72 rentals. There will no doubt be turnover.

I’d certainly skip this one, but your appetite may differ. My two cents.

Even if the homes were privately owned, I would still figure an expense ratio of 50% on a good day and I’d want a higher cap rate.


Brandon - thanks again for your input. The deal does include the homes (wish it did not).

Brandon is right. I forgot the POH. My expense ratio is way off. That .7 multiplier did not take into account the POH.