Just a quick one, the park is 45 sites with 73% occupancy and 67% economic occupancy. So the calcs I have are:
73% =33 occupied sites 33x356x12x.7x10= 982,346.
67%=30 occupied sites 30x356x12x.7x10=897,120.
So I use the 67% right? Numbers look good and there is growth potential so I am working the contract to tie it up.
“Economic occupancy” is a terrible term, because it’s even more bogus than the standard “pro forma” assessment. Take the simple number of lots and the current rent level, and go with that. Some people use “economic occupancy” as a way to screw up your thinking by using what the lot rents could be, and not what they are. Only use the current lot rent, nothing more.
Do all the lots have resident owned homes?
Are there POHs on the unoccupied lots?
It has 9 POH with 2 vacant. I talked with my new buddy Ricky at Clayton homes in the same town and he gave me the lowdown. The owners seem to like to raise the rents just because and the going rate should be about a hundred lower or so. The place has tons of potential already built in and Ricky told me that at the right lot rent it would fill up. So I just sent a LOI to the broker. Not tied up yet but first step is in place. I won’t lie though, I peed a little when I sent that out, first deal and all. I’ll be calling you Frank to discuss this when I hear what the seller comes back with.
Looking forward to your call.
@MichaelG , as per your statement:
- “I talked to my new buddy Ricky at Clayton homes in the same town and he gave me the lowdown. The owners seem to like to raise the rents just because and the going rate should be about a hundred lower or so.”
If the current owners have the Lot Rent priced $100 over market, that would cause me concern.
Perhaps the current owners are ready to negotiate.
However, when Sellers start talking about “Pro Forma”, the dollar signs are probably already rolling in their eyes.
We wish you the very best!
I would recommend you make your offer based on the seller’s financials if you can get them (use their current expenses not revenue). If they have a broker, then there is likely a marketing package with financials. Also, if the rents are $100 over market, would it not make more sense to rebuild your numbers using $256 as your lot rent instead of $356? Especially if this is what you are seeing as your upside.
Next time you do one of these, you need to get clarification on the paying units and run your numbers only on the units that are actually paying and occupied. It’s pretty commonplace for us to evict at least 4-5 tenants during our first month of owning a park. Ignore physical and economic occupancy and take the 5-10 mins to get a handle on this. Screwing up the revenue evaluation can cause a huge overvaluation once you reach diligence and this overvaluation can be hard to overcome if you need to re-negotiate. Last park we lost in diligence was as a result of the owner having 4 “paying” units that were vacant tenant owned homes and 2 other units that were over $1,000 in arrears. It resulted in us dropping our price from $520k to $477k. Had we asked all of the right questions, we could have saved ourselves a plane ticket, 3 days, and hotel costs.
Thanks for your advice
I’m not sure where they are on negotiating the price but they just shot me down on the owner financing. I have the 20% to put down on the place but it leaves me with less upgrade cash than I would like. Now to talk to the bankers I guess
Try making a higher offer contingent on a Owner Take Back. Sometimes paying more comes out less in the long run assuming they are in a position to hold.
I usually submit 2 or 3 offers at the same time based on Owner and Non Owner financing.
Noticed you said 20%…have you received a quote on financing from a broker? Best i was able to find was 25% down which shot down the deal…too low on reserves for my comfort level…
If the deal is 20% down (99.9% of banks aren’t doing this right now), you should hold an additional 5%-7% in reserves and CAP Ex. Your park is city W/S so less reserve is probably OK, but you need to start life on this with at least $20k-$30k in your operating budget.
Again, to reiterate my point above, be very careful in diligence. Owning a park for the sake of owning a park is not worthwhile. Make certain the numbers make sense. Parks this size are bought/sold at true 10CAPs. Don’t let the numbers (or the seller’s manipulations of the numbers) screw you up. Best of luck to you on this!
Greg – you say that you make an offer “contingent on owner take back.” What does that mean?
I am prepared to pay more to get better terms. In some cases when I know I have no chance in h*ll of getting bank financing I will make a bank financed offer 25-30% lower than the offer I make with a vendor take back. The seller is then considering two wildly different offers. I don’t over pay but I will pay somewhat more without going over what it is worth to me. Mom and Pop owners are great targets for this approach as they own the community outright and see holding the mortgage as a steady income stream for 20 years. You can get 0 interest, long terms etc. and it often makes them question their valuation when they see multiple offers.
Financing is a close second right after negotiating when it comes to making deals happen.
Ok so to test the waters in set up a Craigslist add and have 4 contacts with regard to this park in 24 hours. Can this be enough of a sample to make any decision? On another notes they are not up for seller financing and have 20% to put down but the less than 80% occupancy and bank financing has me troubled. I think this can be an awesome park in 5 years and well over 4 times present value. Any thoughts?
I’m no expert, but I imagine that 24 hours is not nearly enough of a sample. At least a week, I’d say, and a month would be better (you can do this during the rest of your DD if the first week looks good).
20% to put down might not be enough, I would expect 25%-30% minimum to satisfy the bank and you’ll need an operating cushion to start out with to boot. You don’t want to crash and burn just because you had a run of bad cards right at the outset.
You can limit the risk of bad cards by doing thorough DD but there is always something that is unknowable in advance.
I’d like to point out that’s nothing MHP-specific, just general thoughts.
I’d like to hear your explanation of 4x present value in 5 years – how do you plan to get there from here?
For the record, that is a compounded 32% annual growth in capital (plus expected 10% CAP in the interim) for a ~42% Return on Assets (some of it tax-sheltered by depreciation, 1031-exchanges, etc). If you leverage and pay less than 10% for your borrowed money, your returns are commensurately higher.
Of course that’s your “optimistic-case” projection but your worst-case projection is hopefully satisfactory (after DD).
What’s not to like? – but how do you figure 4x present value? I did not see in this thread what you expect to pay, only a starting point estimate of value per F&D’s formula. If that’s your guide, where are you changing the numbers to make it come out 4x higher?
Brandon@Sandell
Agree with @Brandon I see no scenario which justifies this Park being 4x present value, especially given you already mentioned lot rent is already above market. Even 2x seems like a stretch. This story needs to be realistic or the Banks will balk.
Valuation number is calculated with not the most scientific way but my DD so far has an extra 140+ sites fully prepped and ready for homes that the previous park owners decided not to fill. So I know the next question is ‘why not?’. Ok so I haven’t gotten there yet but I. Think the Clayton homes and cash program may fix it. I’m now at 7 calls. So maybe I’m just screwing this all up, being new and all but I think I smell opportunity, and maybe I’m not the one for this deal
So your original post indicated that 30 sites were economically occupied making it generate 30 sites worth of lot-rent. (market rent being whatever the comps in the area tell you it is.)
You stated that the park is 45 sites. That means there are 15 sites unused.
What are the extra 140+ sites and who is filling them up with homes and on whose nickel? And you’re going to do 5 sales per month? Or all rentals?
Alternatively, you are saying that your plan consists of building value by quadrupling the number of sites paying rent. Great plan! Can you get 30 people in per year? that’s one a week in the busy season and none in the off season. That’s a park that’s less than 25% occupied, not 67% occupied.
What are the comp vacancy rates?