MHP Evaluation - Cost Method Vs Sales Comparison Vs Income Method

I am interested to know what would be the evaluation of the park with the following details in each of the method and what should be the right offer. Thanks.Fairly mature park with almost no scope for improving the rents or cut expenses etc.,28 lots rented @ $195/monthTotal of 31 lotsAsking Price = $460kCity Water and Sewer and City Roads. Paid by Tenants.Cap Rate = 10%The area is in the 500 year flood plain.Country Appraisal District Property Market Value: 85kLot only, No POH.Request your guidance for finalizing the offer rate.Agent says that the flood insurance is not required and we should include a clause in the lease agreement. No Owner Finance.

The only evaluation tool we have with limited data is the income approach. The other types of eval require market research, and frankly to do the right would take weeks. A highest and best use appraisal is a very complex document that requires a very complete understanding of the local area, the economy, the population base, the mix of property uses and the forecasting for each of the previous things mentioned. 

Many times assessors have to use a cost analysis because they don’t have access to the sales that appraisers do. Most readers of this forum know that its usually not feasible to build a new park.

Also, in depth income analysis is foreign territory to a lot of assessors. Where the assessment matters is when you pay a price well above the assessed value, your assessment and taxes may increase significantly.

Qualified appraisers look at the income the same way you as buyers do. We use a sales comparison analysis for additional support to the income valuation.

Erik,First- congrats on the MAI- my wife has the same shingle. Also- t is very important to note assessors are only to value land and buildings, not the business. Because they look at the contract- many of the values are based on the total you paid, not just the real property. You can fight that. 

Jim, Have you had success fighting an assessment that valued the “business” over and above the land and improvements?  I asked this question in another thread recently and Frank indicated he thought it was a losing proposition.  At least that’s what I understood…PS I agree with a lot of your posts on this Forum!  Brandon@Sandell

28 lots x $195 lot rent x 12 months x .6 x 10 = $39,312. That’s the approximate value at a 10% cap rate. No way it is worth $460,000 at a 10 cap rate. The seller is leaving off a ton of expenses. The expense ratio for a park like that is at least 40%. Compare that to the seller’s expense ratio, which I’m betting is more like 20% because he’s leaving off things like management and maintenance, and showing artificially low numbers on property tax that will not hold true after you purchase it. Add in the 500 year flood plain and his price is not possible.

Brandon,Yes. We have twice now had our values reduced. It was not all we wanted, but there were reduced never the less. In one case several other businesses were used as examples to show the assessors office had used real property values for valuing the land and improvements, and not the sales cost of the real property and the business. 

Thanks Jim!

You have a very good point about business value and assessments. I have seen many contracts on properties that involve business value over the past few years (MHP, C-Stores, Restaurants, etc.). Sometimes there is not allocation made and everything is bundled and transferred as real property. Other times significant portions are transferred as business/goodwill.

I’m interested in how you argued your assessments were too high? I would think the assessor looks at land value plus depreciated improvements. But how do they, the assessor, value the land when there are normally no land parcels purchased for MPHs? Or how do you as the property owner argue the land value? Seems like a very grey area.

On an informal basis only, you go in with photos of how ugly the park is and tell them “if you think the park is worth as much as the assessment, then I’ll sell it to you. Look at this dump.” They will normally give you a reduction just for showing up and because they think your nuts and want to get you out of their office. Expect 5% to 10% reduction in value if you have good B.S. skills, and the town is solvent. But we never push that strategy to a formal hearing, as those folks are a lot more intelligent and not easily bluffed – and the way that park values have been rising, the last thing you want to do is open Pandora’s Box on what your park is really worth. Unless the assessment can be disproved with a recent sales contract (like if we’re buying a property in REO for $1 million that had been valued at $3 million) we don’t push our luck.

Thanks Frankrolfe for your guidance.Just have a few questions on your guidance.1) If the seller is willing to negotiate to 10% true cap rate is it worth consideration for a park situated in 500 year flood plain map? In this case if the seller accepts $393k instead of asking price of $460k is it worth?2) For this park, heard that the city water, city sewer and electric are directly billed to the tenants. One more point to note is that there are city roads. What would be the expense in this case? Would it be 30% or 40%? What would be the typical maintenance / maintenance cost in these types of parks?3) I agree and understand the property tax impact as it depends on the sales price.Thanks in advance for your guidance and I highly appreciate it.

Erik,It does not take much to show the assessor that a big chunk of the value you have purchased is really cash flow. Depending on who we are talking too, we might just give a wild example and work down from there. So- lets say the MHP was empty, no homes at all. What would the value be. You can show that with the appraisal many times. You can break down the costs of the improvements in the purchase contract. What is the value of a McDonnalds. Now take the same building, on the same corner- empty. The empty building is the assessed value without the business. Assessments are based on the value of the real property, not what the business is worth. 

Just to let people out there know – I agree in theory with Jim – the empty building value (or empty park value) is what should be assessed, but as Frank said, it’s going to be hard to push our luck.  In our case, the “real property” value should be something like X, and we’re assessed at ~2.5X, but the recent appraisal (for refinance purposes) is something like 5X (which is about right for the FMV of the whole business).  The chief appraiser basically said "I don’t care what you think, I’m not going to change your assessment."We’d like to go down to X but we don’t want to go up to 5X.  So we’re not rocking the boat by going over his head (to a formal appeal and/or court).  In this county, property taxes are a significant fraction of our operating expenses but we have to pick our battles, and this is not one we are going to win, I think.Brandon@Sandell