Didn’t see a post which specifically addressed my question.I have a park whose lots each rent for $250. At a 10 cap (ignoring expenses!) each lot has a value of $30,000.I recently had to demolish one of the mobiles, so the lot is empty, but utilities are there, and it’s ready for a new home.If I were to sell the park without bringing in a new home, how much lower should the park be priced because of the lack of an income-producing home on that space? (again, ignore expenses).dave
Most buyers value a vacant lot at -0-. That’s how we look at them. A vacant lot requires mowing, insurance, property tax – it actually loses money. And to fill it you have to buy and bring in a home and sell or rent it yourself – which can cost $20,000 to $30,000 to complete. So you’ll have to fill that lot again to realize the $30,000 of value unless you find a buyer who does not know the business.
So, to push the concept to its extreme, a completely empty park, but with all spaces serviced by utilities and ready for homes…has zero value? Doesn’t seem right.Yes, an owner would need to spend, say, $20k, to bring in and set up a home. Then, hopefully, sell it for close to that amount (I’ve done it three times). So he not only mostly recoups his cost of the home (even if over time at a good interest rate), but he then begins to collect space rent. He spends $20k. He recoups the $20k (over time), then immediately begins to collect $3k/year. The ability to do that has no value? Really?
The ability to do that has no value? Really?Correct. For a buyer a vacant lot has no value due to the time and effort required to create an income. On the other hand a vacant lot also has no value to a seller otherwise they themselves would have but the effort into making the lot productive. The value of any income producing property is based on present income not future potential income. If a item is worth $1000 as is but potentially worth $2000 with the investment of an additional $300 should I be paying $1700 to purchase that item. No, the seller is forced to discount the price to market value if he is not prepared to do the work himself before selling.
To piggyback on Frank’s comment about a vacant lot actually costing money to maintain, something also to keep in mind is even when valued at $0, vacant lots can further cost the seller by increasing the cap rate. In other words, if you have a 100 space park with 50 vacant lots, not only would most buyers assign $0 value to each of those vacant lots but they’d also probably only be willing to buy at, say, a 12 cap because of the poor occupancy rate (unless there are other extenuating circumstances, of course). Granted, that doesn’t totally apply to your case referring to a single vacant lot, but it is in line with your “extreme” example of an empty park.
As a SC Real Estate Broker I would have to agree with Dave (DShinnick).YES, the Vacant Mobile Home Lots have ‘Some’ Value.Do the Vacant Mobile Home Lots have the same Value as Occupied Lots?- NoDo the Vacant Mobile Home Lots have a $0 Value?- NoThe Vacant Mobile Home Lots have a value of somewhere between an Occupied Lot and $0.The Vacant Mobile Home Lots at the bare minimum have a ‘Dirt Value’.However, since the Vacant Mobile Home Lots could be income producing in the future (with some capital investment), the value should be higher than just ‘Dirt Value’. Yes, the Vacant Mobile Home Lots have expenses of Mowing, Property Taxes, Insurance, etc.Yes, Greg is correct that a Cash Flow Property’s value should be based on ‘Present Cash Flow’ and not ‘Potential Future Cash Flow’.However, the Property’s value should also take into consideration the ‘Dirt’ value of the Vacant Mobile Home Lots and Green Space.Dave Reynolds would give Vacant Mobile Home Lots the value of 25% - 50% of an Occupied Lot (from a Dave Reynolds’ Article written in 2007…if “you are able to fill up the homesites with minimal investment and effort”).What if there were 2 MHPs for sale which were exactly the same with the exception of # of Lots and Acreage. Which one would you purchase?- Same Price- Same Financing Available- Physically Next To Each Other- Same Utilities- Same Infrastructure- Same City- Same Year Of Mobile Homes- 35 Occupied Lots (Lot Rent Only)- Same Lot Rent PriceThe exceptions are the # of Lots and Acreage:- MHP #1: 45 Lots (35 Occupied Lots & 10 Vacant Lots) & 10 Acres- MHP #2: 35 Lots (35 Occupied Lots) & 8 AcresI would most certainly purchase MHP #1 as it has more Green Space and more of an upside (10 Vacant Lots).For those who value the Vacant Mobile Home Lots as $0 what MHP would you purchase?We wish you the very best!
I like Kristin’s hypo laying out the two parks side-by-side.I’d buy #1. More upside. But, #2 will have greater cash return because of lower expenses in the form of lower property taxes and lower landscaping, plowing, etc. So if I was looking for current cash flow, I’d pick #2 if they were the same price. Of course, in reality no two parks are exactly alike so the hypo only goes so far.Empty spaces cost money, time, and aggro to fill. There has to be a premium for that, either in the form of discount to price (empty spaces cost money i.e. lower the purchase price) or in the form of potential payoff when filled (the usual way to think about it, I think). But that potential payoff belongs to the buyer and the seller is not going to successfully argue (with me) that the “potential payoff” is worth my paying cash at closing – I’m going to be paying with my “sweat equity” and my later capital investment (bringing in the home).Brandon@Sandell
Dave Reynolds’ Article - “Mobile Home Park Valuation” - July 18, 2007 :- 25% - 50%: Value To Vacant Lots - 25%: Dave Reynolds Leans TowardDave Reynolds’ Statement:“In some cases, you will be able to fill up the homesites with minimal investment and effort so you may place a value of 25-50% depending on your comfort level. I would definitely lean toward the 25%.” Dave Reynold’s Article:http://www.ebay.com/gds/Mobile-Home-Park-Valuation-/10000000004031735/g.htmlWe wish you the very best!
Well said, Kristin. I’d buy #1 and plan on filling those spaces, assuming the demand is there. I would guess most park owners look for the opportunity to expand; they see occupied lots as income-producing assets, otherwise they’d have never gotten into the business in the first place.dave