Help with Making an Offer on Park

Hi Frank, Dave, and others… I’ve been notified of a park owner here locally that may be interested in selling. But, I need to act quick to at least make an offer if I’m going to do this. There are three other parks in the immediate vicinity, all located just off the same paved road. The other three parks have a much nicer appearance, with paved roads, better landscaping, newer mobile homes, etc. The owner of a couple of these other parks has let it be known on more than one occasion that he is interested in purchasing this park. Apparently, the other day the manager was told to inform the other park owner to make an offer on the park. I told the manager to hold off for a few days and let me see about making an offer first. I’m hoping to get some good advice from some of you guys. I purchased some manuals and audio by Frank and Dave about five or six years ago, and I read one of the manuals through and listened to a good bit of audio, but I haven’t done much since to be honest. I hate to make this such a long story, but I’ve found out a decent amount of information already.

The reason that I know about the opportunity is because an old friend of mine from high school manages the place and told me about it. I would not want to purchase the park and get rid of him, even though that may be what happens if someone else purchases the park.

Here is some of the info that I know:

The park is very close to where I live, but the park owner lives on the other side of the country in California, and very rarely visits. This particular park is full of almost all Mexican residents (my friend speaks fluent Spanish by the way). There aren’t very many newer homes in the park.

Plat number 1 is about 19 acres total, but a good bit of the back half of it is in a flood zone. So, there are

36 total park spaces in what I estimate to be approximately an 8 acre area or so. All of the spaces are occupied and there are zero park-owned homes. There is also a single family home at the back of the park which takes up about 1 acre of this plat. This is where the manager lives rent free. I would guess the house is worth maybe $80,000 or so as it sits.

Plat number 2 is about 15 acres and a good bit of the back half of it is in a flood zone as well. There have never been any homes on this plat. I estimate that there may be 7 acres here that could accommodate mobile homes on this plat if it is zoned for them. Currently, the grass on the 7 acres or so is just a maintenance expense that must be mowed or bushhogged three times a year or so.

The water is not sub-metered. There is more about the water situation that I will mention later. The mobile homes are on septic tanks. There are only 34 total septic tanks, because in two locations, there are two homes attached to one tank. There may be some doubt as to whether all of the tanks perk properly. The roads are dirt, gravel. The park doesn’t own any equipment.

Here are some of the other numbers that I know about:

Revenue:

$200 month per lot (36 lots), includes lot rent, water, and garbage pick up (No other revenues)

Known Expenses:

$375 per month for garbage dumpster that is emptied 3 times per week

$126 per month for 3 or 4 street lights

    $175 every 3 months or so to have the streets scraped/dragged

    $300 per month average for maintenance help (Repairing plumbing leaks, Cutting tree limbs, 

         Grass cutting, other)

    $600 or so per year to cut grass on vacant plat

    $2,370 per year property tax total for both plats and single family house

    $800 per month is what the manager told me he gets.  He also gets free rent in the single family 

          house.  I’m not sure if he pays for the water or power bill at the house.  

Other Expenses:

I realize there will be other expenses that I haven’t calculated. Such as general liability insurance, telephone, office supplies, accounting, fees/licenses, etc.

Significant Issues:

Apparently this park hasn’t turned a decent profit for a while, and has probably been losing money recently. The main reason for this recently is the county water bill. Apparently, the water bills have been SKY HIGH recently. With bills of $2,800, over $3,000, and close to $4,000 recently. According to the manager, while they did have a slight rate increase a while back, the water bills used to be much lower. Obviously, sub-metering the water would have to help with this, but I can’t help but think there must be a leak or leaks somewhere. Maybe some of you guys have an idea of how much sub-metering this park might cost. Also, I don’t know how much $ we would be talking about to replace water pipe if that needed to be done.

Now, the park used to pay about $325 to have the septic tanks emptied whenever they needed it. But, this past year, the manager told me they turned that responsibility over to the tenants. However, I don’t think they have verified whether any of the tenants are indeed paying for this on their own.

The manager told me that the mortgage payment is just shy of $3,250 per month, which is being paid to the previous owner. I visited the courthouse today to find out that the previous park owner provided a seller-financed mortgage of $350,000 to the current owner about 11.5 years ago. So, it would seem that the owner shouldn’t owe a whole lot of $ on this park. This would allow me to make seller-financing a part of an offer, if I decide to make an offer. Also, I obviously know that the current park owner paid at least $350K for the park, if not more.

Anyway, I realize that’s a lot for a first post. There’s even more to this story, but for now that’s probably enough. Perhaps some of you could let me know what you think of this scenario so far and how I should proceed from this point. They would like an offer quickly. Maybe what type of contingencies I should have in my offer, or if you guys would even make an offer. Any advice would be greatly appreciated.

I personally would not advise you waste your time considering purchasing this park.

It will be over priced, far to costly to correct the problems and most likley not show a profit.

The best buyer would be the other park owner as he has the skill, ability and income from his other parks to carry the debt, you do not in my opinion.

OK, let’s start with the income. 36 x $200 x 12 x .6 x 10 = $518,400 at a 10% cap rate. However, this park has no upside due to no vacant lots and probably market rent (you’ll have to do the comps) – and a ton of land mass to take care of – so I’m going to up the expense ratio to 50% and value it at a 12% cap rate = $360,000, which is about the same as the existing note.

On top of that, I’m not thrilled with the septic on a park that small – that’s a huge worry and headache without enough upside. And it sounds like the water system may be failing, as well.

And I hate that you have all that extra, worthless land to mow, insure and pay tax on.

So, personally, I’d not buy that park. I think you can do better. And I would not let proximity to where you live be a priority.

Thanks Frank and Greg. I really appreciate the responses.

Although I don’t know how much difference it might make, I’d like to clarify a few things and add a few more comments.

The back area of the property that is in the flood zone is basically just trees/wooded areas. So, there isn’t really any grass to mow/upkeep on that portion. I believe that the vacant lot next door which requires mowing is zoned for mobile homes. Of course, I would need to verify that. Would you consider that an upside? My thinking was that I could move in newer homes starting with this vacant land. Of course, that will cost money. If I could do this, then I believe that I could entice tenants to move out of their older homes and next door into these newer homes. At that point, I could begin dragging off the older homes out of the current park and replace them with nicer homes. Of course, this would take time and money.

Now, based on the original amount of the seller-financed mortgage and the $3,450 payment that is being made, I estimate that about $125,000 is owed to the previous seller of the park. Of course, it could be a little more or less, but let’s use this figure for the sake of the discussion. This has put a couple of ideas into my head. Scenario 1) Suppose I could negotiate with the holder of the note, and get it re-amortized for a longer duration and thus lower the monthly payment to help with cash flow if I were going to purchase the park. Or, here is Scenario 2) The more I think about it, this may be my best case scenario. What if I approached the holder of the note as a note buyer and offered to purchase it from them, for say $100,000 cash today. Then, I would be the holder of the note and could pick up a quick $25,000 if the park is sold to someone else in the near future. Or, if the current owner defaulted on the note, I could own the whole park for $100,000. Or, I could just receive payments on the note if things kept going as is. Also, as the holder of the note, I wouldn’t have the liability/exposure that the owner of the property does.

I found out a little more information after doing a walk through the park with the manager last night.

The water bills have been around $2,800 lately, give or take a little each month. While this is still significant, some of the real high water bills were last year, and they found and fixed a leak which did help reduce the bill somewhat.

Does anybody have a ballpark idea of what it would cost to sub-meter each house, or do I just need to call the local water authority? Isn’t there a way to have a company come in and check the water lines for leaks? How much does something like that cost? Worst case scenario, how much does it cost to put in all new water lines? Is there a ballpark cost per linear foot?

Yes, there are definitely some septic tank issues. One of the houses that is for sale in the park is one of houses that shares a septic tank, and they are apparently getting the worst of it. Also, one home sits directly on top of a septic tank, so it is unable to be emptied. At another home, the owner has to drive his car over the area where the septic tank is located in order to park his car. This hasn’t caused any issues, yet….but is obviously a significant concern. So, these are obviously some pretty serious issues. I’m getting the idea from you guys that attempting to correct this type of situation will require too much time/work/headaches/worry, or be too big of a potential liability, to make purchasing this park a good idea. Still, this is information that could be used as a negotiating tool.

Obviously, you have a lot of diligence items to investigate, but the danger of buying a note is if the borrower fights you. That’s why most note buyers (ourselves included) go to the borrower on the front end and try to work a deed in lieu of foreclosure in trade for eliminating the recourse provision. If the borrower fights you, he can tie the park up in court for years without making any payments at all during that time. I know of one deal that was tied up in court for a decade. Meanwhile, you would be paying giant legal fees – the worst of all worlds. Make sure you understand the risks – and how to hedge them – before buying a note.

Hey Frank,

Man, thanks for the fast response. I’ve never purchased a note before, so I only know enough to be dangerous. But, I do have an uncle nearby who owns tons of older houses and I’m pretty positive he has purchased quite a few notes in his time. Maybe he had his attorney do most of the due diligence legwork.

But, I’m a little unclear as to what grounds the borrower would have to ‘fight me’. If I purchase the note from the former owner, and all of the paperwork is done correctly and my bases are covered, what is it that the borrower is fighting?

Also, I don’t know if it matters, but I would like to mention that I feel that it is much more likely in this particular case that the park will either 1) be sold or 2) the note will continue to be paid as is. I don’t believe there is much of a likelihood of 3) it going into default in this case.

OK, here’s how a note holder would fight you. He’d claim that the note is wrong. He’d claim that there were oral agreements that are being broken, He’d claim misrepresentation and fraud. He’d pay a fee (as little as $65) and file a lawsuit against the note holder. That would shut everything down until it goes to trial, Then he’d delay the trial by coming up with endless delay tactics like his attorney can’t make that date, etc. Once it goes to court, and he loses, he’d file an appeal and start all over again. Then, if he loses again, he’d file an appeal with the Supreme Court. Of course, they would not take the case, but he’s bought another year. Then, when you finally win, he’d file bankruptcy and tie it up again while he works out his bankruptcy plan. Get the picture? Of course, it’s not fair. Of course, it’s not right. But that’s how the court system in the U.S. works.

I’m not saying that every note ends up that way – but it is a legitimate risk, and you have to be aware of it and proactively hedge that risk.

OK. Thanks Frank.

Just trying to keep you out of trouble. But that doesn’t mean you can’t buy notes – just be sure to hedge all risk as best you can.

headstill1 Wrote:


I’m getting the idea from you guys

that attempting to correct this type of situation

will require too much time/work/headaches/worry,

or be too big of a potential liability, to make

purchasing this park a good idea. Still, this is

information that could be used as a negotiating

tool.

This park is in my opinion far too much time/work/headaches/worry and MONEY for you to take on. As far as the problems being a negotiating tool is concerned you may change the price but the problems will not go away.

Again I would advise you pass and allow the experienced park owner to buy the property. I predict if you do buy it you will ultimately end up selling to him anyway at a significant loss just to be able to sleep again at nite.