As a buyer, I completely understand the reasons to not cap the POH income in your valuation. BUT, as a seller, it is hard not to recognize that income and the desire to incorporate the value and income it creates in the deal. As an example, I have a small park with 8 POH’s. Space rent is $250 and I generate from $550 to $650 total for these POH’s so on average I generate $2,800 per month on the POH’ income alone, above space rent. In my opinion, that is income and value I can’t simply dismiss as not being worth anything and assign no value to it when its time to sell. And I have to believe there are many people out there who would see value in that income as well, even a relatively knowledgeable investor. Hands on owners, local buyers, handyman buyers, etc. So, is there a balance point to reasonably acknowledge that income that would be reasonable, fair and valuable to both buyer and seller? Thanks for any feedback.
Are the POHs on some kind of rent/lease-to-own program? How old are they and what condition are they in? And, what has been the expenses associated with renting the homes.
Of course, park-owned home income is income. But the problem is in how you value that income. If you look at a business to buy through a business broker, the going rate is 2 to 5 times net income (20% cap rate to 50% cap rate). A 10% cap rate is reserved only for real estate – and the homes are not real estate, but only personal property. So if you apply a 30% cap rate on the park-owned home income, then here’s what the value of the homes would be under your scenario:$650 home rent minus $250 lot rent minus $100 in property tax, insurance and repairs = $300 in rent x 12 months = $3,600. At a 30% cap rate, that values the home at around $12,000, which may be reasonable in some markets. At a 10% cap rate, the value is $36,000, which is obviously insane. When we sell our own parks, we only value the homes at what a home is worth, not as a function of the rent, because we know that capping home rent at 10% is not reasonable for the buyer.But the easier demonstration is if I turn the table and offer you the ability, right now, to buy any of the mobile homes in any of our communities at a 10% cap rate. Would you do it? If so, we’d be happy to sell you as many as you can afford. To date, we have never had a taker on that offer (although we’re still looking).So the moral is that it’s not the income that’s the problem in valuing park-owed homes, it’s the cap rate that is used.
I have to admit I’m having a hard time understanding this valuation.Of course, the mobile itself is not worth $36K, in your example, Frank. But why isn’t the income worth that much? Why isn’t income from a POH, if accurately estimated, of the same value as income from a non-POH? I wouldn’t want a POH because of the maintenance issues, but if those costs are accurately accounted for in determining the net income from the home, I don’t see why it shouldn’t receive the same cap rate as the rest of the park’s income.dave
A mobile home is a depreciating asset, while land is not (there is not even a depreciation schedule for land under the IRS rules). While mobile homes will last indefinitely, over time the home becomes unattractive in both condition and floorplan. We have found that most mobile homes end up being worth around $1,000 when they get to be 40 years old or so (such as 1970’s mobile homes today) as just basic shelter, just the same as all pickup trucks become worth around $1,000 as long as they’re running, since you have to use them to haul lumber, etc. if you are a contractor.The goal of all park owners is to pass the baton of the home from the park to the tenant – as fast as possible. So that income on the home will ultimately go away (even if it’s 10+ years from now). Since the income will go to zero on the home ultimately, you can’t put 10% cap debt on it. However, the income on the land never goes away, and actually increases over time, so it can handle a 10% cap rate or even lower in some cases.The sophisticated bank lenders and appraisers figured this out decades ago, which is why they will not put any value on the homes.If you feel that the homes are of special value, then keep the homes and sell the park, and pay lot rent on the homes until you have derived your value goal from them.
Beautiful discussion guys. And thanks Frank for the CAP rate rule of thumb info on POH cash flow. Very informative.
Given that range of 20 to 50%, I imagine that the age and condition of the homes generating the cash flow would decide where in that range the CAP rate would fall? I mean, if all the homes were 16x80 Claytons fresh off the line, they would command a premium over a bunch of 40 yo 12x60 junkers?
It’s not the age of the home that necessarily creates the value, it’s the size and number of bedrooms in most markets. Mobile home park customers are more concerned with size than manufacturer or year (which is why NADA guides don’t work well with mobile homes). The reason that our new homes are worth more is because they are larger and have more bedrooms (often 4 bedrooms, which are very rare in parks). You can also get a premium for new homes, because they look and smell new, and some tenants really value that. But a 1980 3 bedroom is going to be worth more than a 1996 2 bedroom, because to our customers it’s just basic shelter.
The other party to remember is the lender. Leverage on real estate can hit 75%, but as Frank notes, NADA doesn’t work as well for homes, so leverage on those is lower. Homes are usually owned in a separate entity than the land, which makes foreclosure fun since the dirt lender is rarely the same as the home lender. When I foreclosed on a park in 2011, the home lenders auctioned the homes and I went from a park with 80% occupancy to 30% occupancy. In another case, the borrower took title to half the POH in his parks and when I foreclosed, I was left with the ones he didn’t want.Without valid titles or the ability to get a certificate of occupancy, we had to demo the homes at $2500/each (200 homes total).Some local and regional banks will either lend on the homes, the notes on the homes, or accept them as additional collateral to the dirt loan. CMBS 1.0 purposefully excluded them to the detriment of CMBS servicers. CMBS 2.0 has new rules, but it’s still a challenge. Lenders now realize that the age of the homes matters because older POH will need to be replaced during the life of the loan and adjust their capital reserves accordingly.