Kindly evaluate my deal and advise on diligence issues

mobile home university
1

Here’s my deal -
I just got it under contract and have done some prelim diligence:
I am sorry it is so long and also sorry if these issues have been posted elsewhere
Thank you in advance for your kind help and feedback!

125 lots - lot rent $180 (market rent I believe to be $190-$225 - still working on getting this #) -
89% occupancy (approx 105 occupied) -
26 Park owned homes POHs (Assume an avg value of $4000 ea) -
gross rents $225k - expenses approx $105k (45% expense ratio) -
NOI $120k -
asking price @10 cap $1.2 million -
purchase price currently under contract $1.1 million
( At this price I am getting the POHs for “free”) - but wait it gets worse! (see below)

Utilities:
the following are direct metered paid by tenant: water, electric, gas
Park pays city sewer for 1/3 of park:
1/3 of park is on city sewer & 2/3 is on septic - (the city ran a sewer line thru the park and nearby lots were connected to city sewer- connecting the rest of the homes would require new sewer infrastructure (see below)

Demographics of town:
only 25k residents ( but a new walmart just opened 1 mile from park and it is 1 of 3 walmarts in this town- the town is a pseudo-tourist town)
it is part of a metro statistical area of 150k -
median home price $100k - apartment rents in the area 1,2,3 br = $490, $650, $825 (“light” Frank would say)
Unemployment rate 8.5% (nat’l avg 6.5% ish)
Major employers - 25+ hotels, 3 walmarts (500 employees), campbell soup, Mountain Aire farms chicken processing (300 employees) - I am having a hard time getting this info and still working on it
density 10 / acre
Fairly high crime rate in the city but police department says the crime is fairly confined to a section of town 10 mins away and the park and its surrounding neighborhoods have had only 1 police report written in 3 years (domestic violence - not drugs or gangs - police dept says the park is quiet and the tenants “behave”)

Infrastructure problem #1
Roads are lousy with lots of gatoring and potholes constantly being fixed - Pierce at Security mortgage group has seen some photos of the roads and says that I am unlikely to get a loan without fixing the roads. I called a paving company who says its possible to resurface the roads for $20 - $30 / sq yd -
Repair cost estimate: assuming the worst that they all have to be redone:
3500ft of roads x 12ft wide =4500sq yd of road @ $20-$30 /yd =
estimated repair: $80,000 to $130,000

Infrastructure problem #2 (the big one!)
The city wont allow septic system repairs of any kind. They want city sewer to the rest of the park
New sewer infrastructure is needed but the city will waive tap fees (big deal right?)
Every time a septic tank or field goes bad the park loses 2 lots (there are 2 lots per tank)
The park is 45 yrs old and septic tanks are failing at a rate of 1 per 3-4 yrs - Big trees live in the park so the city thinks this will accelerate
Estimated cost to convert remaining 90 homes currently on septic to city sewer:
2000ft of mains needed at $40/ft = $80,000 + engineering costs
Run lateral sewer lines from septic tanks to main - $2000-$3000 per 2 lots
$100,000 to $150,000 + road repairs, etc.
Total estimated sewer upgrade cost: $200,000 - $250,000

Total of Road repairs and Sewer upgrade $350,000
(I know this sounds crazy but the bank will demand the road repair for the loan and the park is losing lots without the sewer upgrade)

Solutions (is buying this park do-able without losing my shirt???)
1 - drop the deal

2 Split the cost of road and sewer upgrades with seller and reduce purchase price to $925,000
[$1.1 million price less 175k (1/2 of $350k)]

3 Seller pays entire cost of infrastructure repairs but pay add POHs: new price $1,000,000
($1.2 million + 100k for POH’s = $1.3 million price less $300k)

4 - or some other variation of the above ( you get the picture)

2

I would start with getting a few more quotes on your repairs to be absolutely certain. In any event, you’ll need to plug in your up front CAP Ex into your financial calculator and see what you get. If it looks like crap, then you need to start ratcheting the price back to where it starts to look reasonable again. Also, this seller needs to finance this. It is their fault the park doesn’t qualify for conventional financing and you definitely don’t need to pay them for their poor management. The best way to approach the seller in this situation is with all of the information you provided here. Start with your repair quotes and also show them the challenges you are facing on the financing front. If they still won’t finance or come down on price after you’ve presented your case, then you know what you have to do.

3

While I may be a newbie to mobile home parks, I am a 30 year vet of real estate investing and have turned around many apartment complexes.

I’m interested in hearing other opinions, but there’s just too much risk IMHO.

4

I have a feeling that the price on this will need to be in the $750k-$800k range to start making a little sense again. If the seller can finance it at this price with a low downpayment, then it might start to make sense to go through all of that trouble.

5

OK - I got some new numbers from my spreadsheet – I have already told the seller’s broker that the 1.1 million purchase price wont work because of the cap expenses

ASSUMPTIONS:

  1. Hopefully the roads wont have to be re-paved just repaired, painted, etc
  2. the sewer / road cost will be expensed over 5 years and no longer expensed in year 6
  3. rents will be increased by 5% each year over 6 years and should be in line with mkt average
  4. The park will be valued each year based on lot rent and the 26 park owned homes will be valued separately at $4000-$6000 each - that additional cost is reflected in the purch price below.
  5. The purchase price is set at a 10 cap
  6. My original proforma had 150k or so built in for upgrades because I knew the park had issues
  7. I havent done a test ad or even been to the park yet - I am not going to drive the 4 hrs there without knowing there is a chance that this deal is feasible
  8. homes are being bought through the cash program at 1 per year
    my attempt at a table is shown below to show how the numbers look with a range of capital expense costs - (again, the purchase price reflects a 10 cap)

cap exp - -purch pr - -% down - -value yr 5 - - -value yr 6 - - -cap @yr 5 - -capyr 6
200k - - - 1.090 m - - -54 - — - - -1.51 m - - - - 1.96 mil - - - - - - -15 - - - - - - -20
250k - - - -990k - - - - -48 - - ---- -1.41 m - - - - -same - - - - - - - -15 - - - - - - -20
300k - - - - 890k - - - - 42 - - – - - 1.31 m - - - - -same - - - - - - - -16 - - - - - - -24
350k - - - - 790k - - - - 43 - – - - - 1.21 m - - - - -same - - - - - - - -17 - - - - - - -29
400k - - - - 690k - - - - 44 - – - - - 1.11 m - - - - -same - - - - - - - -18 - - - - - - -31

so… with the help of excel and a great bunch of people here at the forum the answer becomes clearer - My takeaway from this is:

  1. The cap rate year 6 is 20+ percent so that’s good (cash on cash return looks good too)
  2. As you said above this looks like alot of work and alot of risk
  3. WTF! without the boot camp and Frank and MHU I could be looking at having overpaid by 250-400k - years of hard earned savings given as a donation to the seller because of my stupidity!!!
6

105 lots x $180 x 12 x .6 x 10 = $1,360,000 minus $350,000 of work needed = $1 million. That’s roughly the value. However, “roughly” is too dangerous here, as building a sewer system rarely comes in on budget, so I’m going to knock off another $150,000 just to be safe, which leads to a value of around $850,000.

If you could get the guy down to that range, then I’d be more interested. But even then, how are you going to pay the $350,000 to $500,000 cash needed to get he park fixed up? I doubt that the bank is going to escrow that much on a deal of this size, and I’m not even sure that the bank will do the loan with the septic issue.

I would get a more clear picture of the reality of the financing from Pierce – this deal sounds extremely difficult to pull off on the lending front.

7

I am planning to get the details to pierce at security mortgage group and ask if getting bank finance is an option - then letting the seller know that the purchase price should be around $850k - then seeing if seller financing is a possibility - Then decide if all this risk and headache is worthwhile - seems like there must be easier deals out there

8

Concerning infrastructure:
If sections of the road are failing a full depth repair maybe necessary, which in my neck of the woods (a little below the US average) is closer to $43/SY. The cost simply to place a 1" overlay on the road would be significantly less around $8/SY.

The cost of the sewer is difficult to determine. If there is rock the cost could be astronomical. The depth of the pipe and access are the other big items. You might be able to figure out cost based on the elevation of the manhole you’re tying into.

One big issue is sewer layout and sequencing. If the bank is requiring major road repairs now, you don’t want to have to tear up the road to lay a sewer line later, especially if the sewer line runs underneath much of the road.

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9

I e-mailed Pierce at Security Mortgage about finding a lender when such a big up front capital expense is needed. He says his lenders are very reluctant to lend in such a case. I thought about it more and it doesnt make sense that a lender would take on so much risk. If the work begins and we hit rock as Berlantliu says and the project costs become astronomical and I have to stop the work what then? I have a park that will someday be worth 1/3 of its purchase price because 2/3rds of the lots have to be vacated when the septic eventually fails. And the lender is my partner in the deal. If i was the lender I would say no way to a deal like this.

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10

Personally, the only way I’d even consider this deal is:

  1. Seller finance non recourse with little down.

  2. Have enough capital on hand to do it right.

  3. Get it at a price that makes sense on a risk reward basis.

I am new to MHP investing but have 30 years experience in real estate investing and turnaround.

That’s my personal opinion