I am considering a park that comes with 39 RTO homes. How would you determine the value of these notes? The park price seems reasonable, $1.1M for 60 occupied lots out of 70 with avg lot rent of $250, water and sewer are individually metered and collected by the city. The seller values the notes at $400k. What does the wisdom of this crowd think?Thanks!
Not enough information yet. What are the ages of the homes? What do they rent for? What’s the median home price and average apartment rent in the market? What’s the condition of the homes?
Not sure about the age of the homes yet. The RTO price is $550/mo. The median home price in the area is $89k and the avg apt rent is $600-700/month. Thanks for the comment!
The basic question is if you can reasonably receive $10,000 per home. If these homes are 1990 and newer, 3-bedroom, good condition, and the test ad pulls well, then maybe. Obviously, you would like to value the homes at zero, but that’s not possible, so let’s figure out the value constructively. First of all, I’m assuming that all of the homes are occupied. The note spread is $300 over lot rent. On a rent/credit system, that’s going to give $150 per month in credits, which works out to a roughly 6 year hold until paid off. The rule of thumb is that tenants blow out around 7 to 10 years, so you’re time frame is reasonable. You also have to figure that maybe 50% of those already in the homes are going to stick (assuming that they’ve been there a while already). So you would have to renovate and re-market 20 homes – that’s why the current condition is so vital (is it $4,000 or $10,000 per home to renovate?). Assuming that 50% of new tenants stick, then you are going to go through several cycles of this (rent 20 and 10 blow out/then rent 10 and 5 blow out/ then rent 5 and 3 blow out, etc.). Each cycle is going to cost you between $1,000 and $4,000 to renovate the home to put it back into service (based on the quality of your tenant). You can build a basic model based on these assumptions to see if it’s possible to average $10,000 net of all costs per home. Another option is to let the existing seller carry the notes and just pay you lot rent, with a signed agreement that he can’t pull them out no matter what happens. That’s our normal negotiating stance to keep them honest about the values.One more observation. To go through this much brain damage, the deal has to have extremely strong qualities in other areas. AT $250 lot rent and 60 occupied, that’s only a 10% cap rate for that price. I think you must be able to push the lot rents up $50 per month (and push the water/sewer back on the tenants) to make this deal compelling to begin with. You know you can increase the lot rent on the 40 POHs, right? But you’ll need to know the rent comps to see where you stack up.Without the age and condition of homes, as well as the rent comps, you really can’t evaluate yet.
Thanks Frank. I would prefer the seller keep his notes! The tenants already pay water and sewer to the city. I don’t have that responsibility! The seller has owned the park for less than a year, I believe he instituted rental increases. Quite a bit of infrastructure work has been done to the park (paving, water lines, rehabbing the 39 homes, etc). That said, is a 10 cap no longer a desirable target? Thanks again!
A 10% cap rate is a great target. However, if you guess wrong on the homes, that 10% could become a 7% cap (if you end up eating the $400K in home notes).Mobile home parks are like people – they have good and bad traits. To make a deal compelling, the good traits have to outweigh the bad. The notes, in this deal, are a bad trait. You have to unlock something equally strong on the good side to make up for it.
I just want to point out that mathematically, if you figure 50% of the tenants stick around every iteration, this is equivalent to expecting 100% rehabs. If you figure you will rehab every home “before” you make a profit, you had better be able to profit on the demographics of the market i.e. there is a sufficient spread between home rent and lot rent after you’re in for your purchase price and your rehab costs. I think $5000 is a typical rehab estimate (to be safe, more than Frank’s $4k), although it may be higher or lower in your market according to what your customers expect/demand for the amount of money you are charging in rent. Take a look at the homes (each and every one) and make your own judgment call. Building in $5k for the rehab, and paying $10k for each home means you had better be able to sell at $15k-$30k or rent for an equivalent amount. We typically sell on 10-year note at 12% (figure 10% return after loan losses) 10% down, which is affordable and brings the total payment in line with what you would figure a 3BR home or apartment typically would rent for. It also means we are not making more on the financing than we are on the desired cap rate of the park asset. (We are not preferentially investing in lending versus parks). The park asset is also leveraged whereas the home financing typically is not. You have to run the numbers that make sense for you, but RTO @ $300 over lot rent seems too low to me. This is one red flag. SFR @ $89k is another (would prefer to see over $100k). Given your comps (which seem reasonable) I’d look for $650 ($400 over lot rent) in a market test to see what the demand is like. You can bring in a new home for about that much on a 10-year note.The next question is how fast can you refill those homes if/when you realize you need to evict non-payers or other problem tenants. That takes time and while the homes are vacant they are not bringing anything – so there is a time that it will take to realize this “return” and that where the biggest uncertainty I think is.That’s our basic model, at any rate. Comments welcome.Brandon@Sandell
P.S. RTO notes/contracts/loans that are not Dodd-Frank compliant may be a liability, not an asset. Just make sure you are comfortable with your risk and business plan. We run a captive finance arm that is compliant (we think!) so we can re-paper anything we purchase if we need to (this has not yet come up but it may).Brandon@Sandell
And as Brandon is inferring, it’s a great idea to have any package of “notes” held in a separate enity vs that of any rental homes and/or the park itself. Notes offer cash flow and value that’s enticing to people who might sue you due to negligent rental home or park activities. By placing the notes in a separate entity, you create another firewall between those assets and potential park operations liability. The firewall can also work in reverse in the event the Fed Gov’t ever hires staff to enforce all the Dodd-Frank regulations which are so complicated and long, it’s near to possible to completely comply.
In the event the notes are not compliant it will be a powerful negotiating tool to persuade the present owner to hold the notes and you only buy the park.There is however a major down side to having one owner controlling 65% of the homes in your community, they will also own you. Pretty difficult to inforce any community standards with one owner having so much leverage.
Gregg your point is right on. You could get an agreement that seller cant move homes out of park but then they have lots of control over you and your operation. I t hink its better to pay a little more for the homes, recoup your money through rental or sales.
From what I have run into most sellers do not want to keep the homes and sell the park and they will wait for another buyer.
It seems to be a sellers market for well run parks right now.
Catch 22. You want to own and operate a park not the depreciating asset and headaches of buildings. Many ill informed Mom and Pop owners invested in renting houses devaluing the park side of the business. POHs are nothing more than a liability especially in low grade communities. The nicer the park/ the nicer the homes/ the more they sell for/ the higher the quality of resident. When looking at parks with POHs steer clear of the idea of affordable housing think instead whether the community will attract better quality tenants.
Over 30 years in ALL aspects of the mobile home park business I concur 100% about the valuation of POH’s in parks. POH are a crutch that shows maybe the area is weak on new tenants bringing in new homes and thus utilize as a stop gap to fill in empty spaces but sometimes owners never get rid of the crutch thinking they are getting a great return on depreciable assets and when their time and money is fairly calculated the real bottom line is realized.
I needed to say concur with Greg.