How would you value this park?

Hi Everyone, I’ve got a 2nd community I’m looking at.34 Spaces, nice clean community in a secluded location but in a major metro.Lot rents $340, no room for rent increase. Rents include septic and water.New septic installed in '08 ($230K)1 house bringing in rents of $975 per month. Estimated value of $75K on the house.NOI supported by tax returns of $90K.No deferred maintenance apparent.

Septic is a big red flag.  We won’t buy parks with well water or septic.  There is simply no way to do due diligence on public utilities.  I once purchased a park on septic and called both my state Department of Environmental Quality (who assured me the septics were working correctly and that there had never been a violation in the life of the park - 35 years), and hired a professional septic expert who came and inspected and he assured me in writing that the septics were working correctly… 4 months after I purchased the park, the DEQ said they had a report from a tenant about surfacing sewage and that we’d need to cut down a tree that was interfering with the lines ($3,000 expense) and we had to replace some line (another few thousand dollars).  These expenses were not ‘deal killer’ type problems, and the park had a lot of upside to improve cash flow that more than paid for these improvements, but it was scary that these problems existed and that both the government and a septic expert did not catch them … until the ‘new guy’ bought the park, of course.  It could have been much worse.  But if relatively minor problems like this are not caught by the experts, then who knows what larger problems the experts might not find at your park until after you purchase it.  There is literally no way to know if/how well your septic is working.OK, all that said, I’d value a park like this ‘the normal way’ and then subtract the cost of a new septic.  Just assume a few months after you purchase the park, the government will come knocking on your door and tell you you have to replace it all.+ 34 spaces x $340 x 60 = $693,600- cost of septic (get bids, but I’m guessing costs have probably gone up since '08) = <$275,000>+ value of the house (depends on whether the house can be separated from the rest of the park and sold-off separately) = $75,000 (your guess)==> $493,600The wild-card is obviously the septic.  If it is good, then you have no problem.  If it is not, do you have $275,000 for a new septic?  And/or would your bank lend you the money to make the improvement?It’s just not worth the risk to purchase any property type on private utilities.My 2 cents worth,-Jefferson-

The decision to buy in the country on septic whether it be a personal home or a park community is the same except with a park the rental income is designed to not only provide a profit but also to pay for the expenses of that property long term, septic included. With all income properties the choice between city or country boils down to pay now or pay later. This translates into monthly cash flow being impacted to varying degrees by dept repayment. A properly managed and financed rural park, including managing for long term expenses such as septic should be both affordable and be profitable. The question one needs to ask/answer is, do I have the finances to afford a city park now or do I avoid risk and sit on the side lines choosing to not purchase a rural community ?Additionally what is your long term goal as a investor. Is it to own and manage one, two or three parks or am I building a corporate conglomerate of communities. Every community is presently owned by someone, if they can do it and make money why not the next owner as well. Income properties are a investment and with any investment you need to be comfortable with the vehicle you chose and to be successful you must have a thorough business plan, excellent money management skills and the knowledge to chose a property that suites your goals through proper due diligence going in. Every income property is a good buy at the right price.       

Thanks you Greg could not have said it be better plus I have always bought in semi-rural areas and I believe our returns with good management allow us to have better returns per site versus manager operators.

When you say the replacement of the septic in 2008 was $230k, I’m assuming that the park is on one giant septic.  This should be a huge red flag even for operators who like septic.  If you are going to go the septic route, I would try to have no more than 2-4 homes per septic.  Just my opinion though.  

“If you are going
to go the septic route, I would try to have no more than 2-4 homes per septic.”

that makes sense if the lots are large enough to support the leach fields. so with a 50 lot park with 10-12 systems one failure won’t break the bank. cost wise its 15-20k per septic so it mightcost more up front.

Yes this community is on one giant septic called a Perc Rite with leach fields in several different locations.  It appears to be a well thought out system, and as you can see, it wasn’t cheap to install.  It has electric motorized components so I’m assuming it’s an aeration type system.

"that makes sense if the lots are large enough to support the leach fields. so with a 50 lot park with 10-12 systems one failure won’t break the bank. cost wise its 15-20k per septic so it mightcost more up front."Think through the numbers on that statement. With 4 homes per bed that would be 15 septic beds for a 50 lot park. A septic bed would be the size of a single lot therefor the park is giving up an additional 15 lots in the housing area of the community. 15 lots at $300 per month rent is $4500 per month, or $54,000 per year which over the life of a septic bed (25 years) is $1,350,000. A septic bed for the entire community would be smaller than the total of 15 beds and would be located usually in a area that would be otherwise unused. My park with 33 lots has a bed taking up the area of approximately 4 lots but is not in a area I could develop due to infrastructure costs.Just something to consider.  

What we are talking about is the risk of having one septic serving the whole park.  If the septic failure on a 34 space park costs $230,000 to replace, it makes it a little difficult to sleep easy at night.  Assuming your 25 year assumption, this 34 space park should be putting away more than $11,500 per year just to prepare for this failure. Furthermore, that failure effectively shuts down your park.   A large septic also greatly affects your exit strategy, especially when it starts reaching the end of it’s life expectancy.  Think about this same park where the septic is 15 years old, as opposed to 5.  That’s what you will likely face when you go to sell (or refinance) in the future. The potential lot space is not something you are paying for or something you can take advantage of unless you are the one building the park.  It’s really not something worth considering if you are buying an existing park.  

Septic is a standard of the industry present in the majority of parks and all rural homes. Simply another part of the equation. Like Mobile homes and Tornado’s in certain areas.As for the a septic failure shutting down the park is concerned septic does not fail instantaneously and is generally replaced while still maintaining service. A properly constructed large bed is actually made up of two beds side by side where the septic can be diverted entirely to one side while replacing the other.  What about having paved roads. Do you only buy parks with gravel roads knowing that in X number of years parks with paved roads will have a $50 - $100 thousand repaving cost. Obviously city parks with city water and sewer having gravel roads are not the only parks of value worth investing in. All investments are based on risk tolerance. I would not suggest anyone invest in something  that does not allow them to sleep at night but every investment providing high returns is always going to have risks. If no risk is a individuals goal then rental income properties is not for them.       

here’s some serious septic exposure

the owner passed away last year at age 100.

I agree with Greg:'Septic…Simply another part of the equation.‘Septic is a risk.City sewer is also a risk if the lines are old and falling apart or clogged by tree roots.Life has risks.As Greg mentioned:’…septic does not fail instantaneously’As per the original post this Septic System was installed in 2008.  This is a very, very, very new system.IF it was installed correctly and is being maintained correctly, it should have a long life.Personally, I would be more concerned about Water coming from a well than a Septic System.A contaminated Well WILL shut you down instantly and get you in the paper.  A 2008 Septic System is a calculated risk that I would be willing to take IF all the other numbers work.We wish you the very best!