I agree with Frank. The valuation of new homes and note income streams is complex when connected with a park you own.
Since we run a captive finance arm (currently on pause until we are confident we are compliant with new Dodd Frank regulations) we are struggling with this question right now, both in our own parks and in parks we might want to buy.
For the short version, I think that if the person you’re potentially purchasing the notes from doesn’t think the notes are worth keeping, you can use this as a club to beat him about the head with respect to the point that they’re not worth buying either.
At his “fair” price, he should be indifferent to keeping the note income stream or trading them for the cash. But theoretical economics can only get you so far in a negotiation, so this point might not be as useful as some would hope.
My longer thought is below:
A new home depreciates quickly and the owner of a new home will usually be upside-down soon after purchase. Why? Many reasons. One is that is no embedded land cost in the value of the home, so the purchase price is tied to the cost of building (or rebuilding), which is relatively small compared to a car or boat or maybe even a stick-built home. Relative to manufactured homes, old (used? pre-owned?) stick-built homes have a built-in upward bias in price because there’s a perception that they will stand up to the test of time, unlike manufactured homes.
What it all boils down to is that you have to value the notes at a discount to their face value if the underlying collateral is “upside-down.” Actually, a discount to their “face” value is only correct if the interest rate properly captures the risk of default – which it almost certainly does not (these notes probably have below-market interest rates). Depending on the facts, I’d guesstimate a 50% discount would probably be appropriate for new notes at “subprime” interest rate (e.g., 13%). I’d guesstimate maybe a 20-25% discount for notes with 5 years or more of seasoning? Your opinion may be different, and if so I’d love to hear any reasons why. So that’s (50%) * 11 notes * $40k average principal amount gives $220,000 to think that the notes are worth.
Then turn around and look at it from the other side, imagine the notes are just plain rentals (which they may be in all practical terms).
(Price you should pay) + (the cost to repair) - (market price for that home after you’ve repo’d and fixed it) - (the value of your time and energy getting the home repaired) = 0. The homes are $20,000 each in my example (you said there were 11 of them). Would they be worth buying at that price if you already owned the park?
That’s my 2 cents. I’d be happy to discuss further if anyone wishes to.