Mobile Home Park Valuation: Newbie/First Deal

Hello, I am a new MH real estate investor in South Carolina investigating my first potential deal. I have a feeling that the price may be too high, but was looking for feedback.

The park has:
19 mobile homes, 10 are rented, all park owned homes
a triplex unit
space for 6 more mobile homes (along with land for another 10 with development)

I have valued the triplex at at 13 cap and based on an expense ratio of 30%
(15000.712)/0.13): 95k

The 10 rented single-wide mobile homes would command a lot rent of $175 with an expense ratio of 30% and a 10 cap
((175100.7*12)/0.1) for the 10 rented single-wides: 147k

The remaining 9 mobile homes have only minor repair work to re-rent and I was willing to pay 1/3 of their value (again at 30% and a 10 cap)
((175100.7*12)/0.1)/3 for the 9 un-rented single-wides: 43k

The 19 mobile homes could easily be sold for 5k, so I’d give 1/3 of the value of these homes; 32k
No value as been assigned to the lot and potential expansion
Total Valuation: ~320k

-Is this valuation reasonable or should I really assign no value what-so-ever to park owned homes?
-The park owned homes apparently are not titled. What problems (if any) will that cause?
-The owner is under the impression that the mobile home income should count for something. What do you believe is the best resource to counter this?

Answering as a fellow Hokie. Sorry your post didn’t get any response.

You are making a couple of errors that I can see:
-30% expense ratio for the triplex is way too low. Probably close to 50%
-30% expense ratio for the 10 rented lots is also probably low, since it is a small park with high vacancy. Not sure the number but probably closer to 50% here as well.
-You would assign Zero value to the 6 unoccupied pads, since they are not providing any income. Why would you pay for them from a business standpoint?

To answer your questions:
-Your valuation will need to be tweaked based on above.
-You absolutely should assign value to the park owned homes. If they are not titled though, you may have issues which you should account for. I would say you have already pretty well accounted for them by valuing at 33% of what you think you could sell them for.
-The owner is under impression that the POH income should count for something. He of course would think that, but he is wrong. If you are already paying for the homes based on their resell vaue, why on Earth would you double pay for them based on income as well? The best resource to counter that is common sense, which he hopefully has. If you cap a POH rent at 10% and it is, say, bringing in $300/month rent (less lot rent), you would be netting $150/month after 50% expenses. Over a year, that is $1,800. At a 10 cap, that is $18k. It would take a helluva man to look me in the eye and tell me a $5k mobile home is really worth $18k without me laughing in his face.

Good luck!

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Thank you for your response Nate and for correcting my valuation mistakes.

This was my first serious look at a mobile-home park to purchase and running through the numbers in a real-world scenario has been extremely helpful.

As an update, the seller is not interested in seller-finance and is unwilling to enter in a purchase contract that requires conventional financing. Even to a novice, this was a large red-flag. This deal is dead as it stands, but I’ll keep looking.

I appreciate all that I have learned, and will continue to learn on this forum.

No problem, you’ll probably find a lot of these sellers trying to find the bigger fool. Keep at it–you will eventually find the one that works for you. Practicing underwriting on every deal you can get your hands on in the meantime will go a long way to building confidence for when you do find the right investment.

After waiting a while, the seller agreed to a significant reduction in price and we went under-contract at 250k.

The problem: Based on new information, I think that I would be over-paying even at this reduced price as some major red-flags have sprung up. Here is what I think are the red-flags and I’ll close with the potential upside.

Red Flag 1: After receiving the leases, it appears that 7 or the 10 mobile homes were rented with one year leases in the two months before the mobile home park was put on the market. This was quite surprising and concerning.

Red Flag 2: Many of the “income” lines in the leases are blank, and the two of the forms that that are filled out have rent to income ratios of up to 50%

Red Flag 3: The rented mobile homes are meet the minimum habitability standard, but just barely. Even the currently rented mobile homes will require ~3-5k of work to bring in better tenants.

Red Flag 4: While several of the homes are repairable, every single home will need extensive exterior work and 3 homes will need to be replaced and are not worth saving. The exterior of the mobile home park does not look attractive and will continue to bring in bad tenants until repaired.

Red Flag 5: The kicker. The owner doesn’t want me to talk to the current manager or the tenants or the person who owner financed sold the park previously.

-The gross-income is currently ~6k per month (including mobile home rent and income from the triplex)
-3-5 of the mobile homes would only cost ~5k to renovate
-The park is in reasonably nice residential area next to a new school
-It could make a great turn-around project; triplex + 15 units (valuation would be 320k ignoring the units that can’t be rented, just based on lot rent)
-I have the support of the local city to continue to operate as a mobile home park; there are no zoning issues
-Immensely strong teaser add response.
-Median house price: 146k, population is small but rising and close to small metropolitan center
-City water and sewer. The city picks up the trash as part of the taxes.
-Sewer and water in good condition

Assuming that 250k is too high, what price (if any) would make this an interesting deal or should I let it drop completely?

Nice job negotiating down to the $250k mark. Hate to hear that that still might not be enough though.

Of your red flags, the only one that seems to be a major red flag is #5. That is odd that he wouldn’t want you to speak to anyone in the park. I probably would do it anyway. If he is legitimately afraid of everyone knowing he is selling the park, maybe he can introduce you as a “new business partner” and then 2-3 months later you have “bought him out of the relationship”. This is sometimes a concern for long term owners.

Red Flags 1 & 2 should be able to be cleared up with a discussion with the manager and tenants.

Red Flags 3 & 4 are just part of the package with lots of MHPs. Make sure you are accounting for the home values appropriately in your offer

Your pros all sound very enticing. If you can verify during due diligence that the $6k gross income has been in place for some time, or has been int he past, then I would probably not worry about Red Flags 1 & 2 a great deal.

I would try to parcel off the triplex and sell it as a separate dwelling and focus entirely on the MHP.

This deal requires going to the end of the movie and working backwards. Let’s assume the market comp lot rent is $250 per month (remember that the POH residents have no idea of the split between lot and home rent) and that you can fill 9 more lots over time, then the park would roughly be worth $250 X 19 X 12 X .5 X 10 = $285,000. Back out the current issues and occupancy, and add in the home renovation costs, and it just doesn’t make sense. On top of that, your red flags are 100% accurate.

Thank you for your feed-back Frank. I decided to pass on that park and have found another that I am now under contract on that I would love to hear the forum’s thoughts on.

Here are the details:

$475k short-sale, management and repair turn-around
80 Spaces near Orangeburg SC (within a reasonable drive to the outskirts of Columbia SC)
56 Park-owned homes (24 rented at a lot rent of $150)
8 lot rents (again at $150)
8 empty lots
6 mobile homes that need to be removed
2 lots with vacant tenant owned homes

Valuation is as follows:
Lot Rent: 45% expense ratio on the lot-rent of $150 for the 32 rented homes for a value of $288,000
Mobile Homes: $3.5k per home and 56 homes for $196k
Total Price: $484,000

The Good News:
-Plenty of upside, even if I can just rent the park-owned homes
-Fair market lot-rent can be raised by $25 to $50 per month and is currently between 175 and 200.
-Each of the park-owned homes require only 1-2k of repair work
-Mobile homes are late-80’s to mid 90’s and include several double-wides.
-Lot sizes can easily accommodate today’s 90 ft long mobile homes.
-A test ad for a 2 bed, 1 bath, livable but not super nice, single-wide in of a similar ago the the ones in the park at $500 per month had a response rate of 30 per week. Most of the people indicated that meeting lessee requirements would not be a problem.
-I have reached out to several managers in the area by calling about their listing on Craigslist ads and several have indicated that they would be interested in helping to manage.
-The problem of low fill rates seems to be due exclusively to bad management and non-existing advertising of vacancies
-other management problems and high expenses are things that I have learned how to address through this wonderful form and will learn more after attending Mobile Home Park University
-Park isn’t local, but is in-state and ~2 hour drive

The Bad Aspects:
-Orangeburg Metro Area has ~90k people (but is within driving range of the outskirts of Columbia SC)
-Median home price is only 77k
-There are 6 mobile homes that are damaged beyond repair and need to be removed (stated by current management)
-Current management; book-keeping and billing
-City water but septic tanks. 3 units are un-rentable due to a problem with 1 septic tank.
-The remaining septic systems all likely need some repair and one septic leach-field appears to be clogged, “it fills up with water and needs to be pumped every month…”
-Financing: I have found short-term financing only at this point, 2 years with a 50% down-payment. I / management will need to fill 1 spot a month for two years to get to 70% occupancy in 2 years.

I think that the valuation is a good deal based on what I have learned and has plenty of upside to compensate for the risk.

Does this sound like a reasonable deal?

I will be driving there shortly and will be inspecting:
-the number and condition of the park-owned homes and other park-owned structures
-septic systems (to tell the septic companies which ones in-particular to inspect/quote)
-meet with current and potential future management
-determine fate of the abandoned and damaged beyond-repair homes
-talk with tenants about what they consider to be problems with the park and what they want to see done

Is there anything else is should be looking for when I visit in person?