Need quick help with evaluation please, DD period ending

Well I’m up against my deadline for due diligence, due to illness with the manager I was finally able to due the interior inspections of occupied units.

INFO: Park has 69 POH. I am basically paying nothing for them. I have the park under contract for lot only value.

QUESTION: Homes were in worse condition than expected. I went around with a mobile home contractor during the inspection. I estimate that each home will require an average of $2500 per home.

Assuming that after the $2500 per home rehab, I can sell each home for at least $5,000 (probably $6,000) on a rent credit program with 75% of rent going towards purchase price.

Is it fair to say that I can at least break even on the homes if I can sell them for at least $5,000 with $2500 total invested in the home?

I know I’m not going to make the $2500 per home spread, especially after Franks 50% turnover rule of thumb, but I need to at least break even.

Our average cost is $4,000 per home ($2,000 parts/$2,000 labor) on a group of homes like that, so I’m not sure how reliable that $2,500 prediction is. But a wildcard here is the ability to sell homes in their current condition as “handyman specials” and letting the tenant do their own rehab to suit their own taste. The other issue is how many of these 69 homes is currently occupied and, as a result, you may be able to convert to an owner without any cost on your part.

The first step is to find out what the “minimum housing standard” is in your state. You need to know this as this is the minimum required of each home to be sold to the end user.

An effective “handyman special” program works like this. You stage one home in perfect condition, one home with just the minimum standards done but zero cosmetically, and then you advertise the “finished” home and then show people the other homes with the line “do you want to see something less expensive?”. That way you attract good customers who have the capital to make the necessary improvements. You never want to advertiser “free houses” as that will attract literally vagabonds who have no money to make improvements or even pay the rent.

Thank you Frank, that’s very helpful, especially the handyman special idea.

Using your figure of $4,000 to rehab a home, at 75% rent credit, selling for $5000 - $6,000 is it reasonable to expect to break even, or at least come close to breaking even?

I really appreciate the help. I owe you a steak dinner next time I see you in FL.

In my opinion based on the number of homes, time commitment, default rate, carrying costs as well as the long term commitment you will never see a profit and will most likely in the end regret being involved is such a large undertaking. In addition your quality of future tenant, based on handy man specials, will continue to cause extensive management problems well into the future.
If you are paying a price for the park based only on the present lot rent income, not the lot rent if all lots are rented, that would be OK but you are still left with the financial responsibility of 69 POHs which are a liability not a asset.

Thanks Greg. The price I’m paying reflects an 11 cap (which is tough to find in FL). That’s lot rent only at a conservative occupancy. That’s also all city utilities with all pipes replaced with PVC in the 90s

If you are in a decent market in Florida, you should have sufficient demand to keep the homes full. But you have to factor in renovations between tenants. Here’s how the numbers would work in my opinion:

Rehab a home for $4,000 and sell for $6,000 on rent credit.

Get $1,000 deposit and first month’s rent.

Tenant runs off after 6 months.

Put another $2,000 in repairs and repeat process.

That would get you $6,000 per home, which would cover your rehab costs of $4K + $2K.

But that’s based on the concept that only 50% of homes blow out before reaching maturity. If you start with 69 homes and assume 50% default, then you will have the following numbers:

69 sold in the first round
34 sold as redo
17 sold as redo
8 sold as redo
4 sold as redo
2 sold as redo

So you will effectively have to redo an average of one time per home (65 defaults). The other wildcard is how many “handyman specials” you can do, as those require near to zero out of pocket on the front end, as well as in default.

The bottom line is that I think you can hit your numbers but you are going to have to do a fantastic job of managing the whole event.

Looks like a full time job for many years to come based on Franks evaluation to do little more than break even at best.
A 11 cap may be hard to find but still does not even come close to compensate for the work involved. Sometimes a bad deal is simply that.
When there are no diamonds in the rough to be had I guess you make the best of a polished turd.

Thanks frank and Greg.

Based on your input and my own concerns I went back to the seller and asked for a price reduction. She has tentatively agreed.

So bottom line is by year two after a rent increase I’m looking at a 14 cap using lot rent only.

I know it’s not perfect but what deal is? I have a good manager lined up ( or so I hope) it’ll be one year of hell I know but the trade off is really good.

How many lots are presently rented and what is the monthly income from lot rent ONLY. Do not include any income from the rental of the homes if any.

How many of your 69 homes are vacant at the moment? If it’s all 69, I’m probably going to agree with Greg on this one. Upside to a 14CAP might not be enough unless this park was 150-200+ total spaces in size. I would also have the seller reduce your down payment to 5-10% assuming this is a seller finance deal. After all, she mislead you to believe your initial capital outlay would be much lower than it presently appears.

I would be very careful with this as most people who do deals like this fail because they lack the capital to pull off a turn-around of this size. Do some soul searching and make certain that you aren’t setting yourself up for that scenario. I see it often enough that I feel that warning is warranted.

Greg, as I’ve said I’ve never included any home rental in my figures or offer price. I am getting the homes for free and giving the rent from them 0 value also. Additionally, there are 2 duplexes (4 units) that I do not count income from either, and a commercial property that is currently vacant. Oh, and there are 6 RV’s rented and I haven’t counted any income from them either. TRUST ME, I have been VERY conservative on all my numbers.

The manager of 40 years is dying and has not been able to manage the park properly for the past couple of years. The park is still 70% full - but

You have to remember that my 3 test ads drew about 4 calls per hour at the higher rent amounts Each time I got at least 17 calls / emails over 4 hours, I pulled the ad because I felt bad for these people. Some would call every hour saying things like “please call me back - I have cash and want to move in right now”

I’ve ran test ads for quite a few parks and have never gotten demand like this. It’s unreal. I pulled the ad 2 weeks ago and still got 2 calls today!

I am NOT worried about filling the park - AT ALL. Demand is huge. I honestly think we could sell 3 homes a day. The only reason the park isn’t full is it hasn’t been managed well for some time.

Last - Capital question - I have $200K already set aside for rehab capital.

Based on your comments, valuation aside, you may be in a very solid position to be extremely selective in your screening of applicants. I would push the price of the homes as high as you possibly can and increase the down payment requirements to attract better quality applicants. Increase your rehab investment and double the sale price. This will weed out the undesirable applicants leaving for far better tenant material that will be more likely to pass screening. You may be lucky enough in the long term to bring up the quality of the community considerably which will make management far easier.

Try running test adds with much higher numbers for home prices and lot rents to get a feel for how far you can push the envelope. If you really want to test the market make it clear in the add that credit checks will be mandatory. If you still get plenty of calls you may in fact have that diamond in the rough everyone is looking for.

Move away from the affordable housing aspect and target lower middle class pensioners and anyone with solid long term employment. Don’t even consider applicants taking government handouts.
A stronger tenant base will also allow you to further increase your lot rents to the top of or above market.

My thoughts almost exactly. I’ve already talked to the contractor, based on Frank’s comment to make one high end “model” I want to do one near the entrance with a front deck and done up really nice. We’ll use that as the ad to draw in quality tenants then possibly offer some “fixer uppers” for a lower price.

Based on demand, I think I can put together a nice, higher end park with quality homes even though they’re older homes.

I learned of a park not too far away that is being torn down for condos and selling off the homes, I hope to buy a few homes there.

One addition that I want to mention. This concept of “do you want to see something even less expensive” works best if you have a golf cart. If they are on foot – or even if they have to get back in and out of their car – they will get lazy and say “no, I’m fine with this one”. Make it easy for them to look at your handyman specials.

Be careful offering a mix of homes. If you want to upgrade the community the type of tenant you want to attract does not want to live next door to a handyman special that is being upgraded via the “board of the month club”. You will be mixing two different classes of tenant that do not fit. One or the other not both if it is your intent to upgrade.
Your last statement now introduces a entirely different element. If you have 69 homes worth nothing and there is a park not far away being sold for development you need to look closer at what the true value of this land really is.
With high demand and near by development maybe bulldozing this park is the way to go. Consider a lease option with zero investment. As long as the present income covers your costs you can try to flip to a developer at the end of the lease. Don’t be the guy investing good after bad if there is a opportunity to make a quick profit short term. Take the money and move to your next investment.

From a risk and insurance perspective, three of the toughest type parks to insure are Florida Parks, Parks with a lot of rental homes, and parks with a lot of older (particularly pre 76) rental homes. It’s quite possible that the insurance options available for this park will include none with loss of income insurance included - so that would be a risk you’d have to take on your own. It appears the homes themselves have limited property value so not being able to insure those well during a hurricane wouldn’t be a large property loss, but it would result in a large income loss at least for some period of time.

Frank uses a rental home safety checklist even a bit more elaborate than the one posted on the “forms” section of - those forms a a great way to assess and track your home maintenance. They also form the basis of a good record keeping system in the event you are ever sued due to a problem with a rental home.

Frank. Funny you mention that there happens to be a used golf cart for sale locally and I was discussing that with the manager.

Kurt I’ve already discussed ins with you on this I’ll be calling you in the coming days

Greg I’m definitely keeping that in mind. The exterior of the homes will be done up right. Only the interiors will need some cosmetic work. The overall look of the park is important to me.