Please review this deal

I currently have a MH park under contract and I’d appreciate any feedback on deal:

This is a 16 unit MH park in a small bedroom community 15 minutes away from a large destination ski resort. The park has 16 spaces, all occupied by resident-owned homes. 10 of the spaces have been rented to the same tenants for 6+ years, and the rest to the same tenants for 2+ years. There are no amenities (pool, laundry, etc) on site so the only ongoing maintenance is snow removal and landscaping. The park includes undeveloped land sufficient for adding 6-8 more spaces, and the city has agreed to the expansion plans, but I’m not including this vacant land in my valuation.

The purchase price is $455,000

income is $320/site or $61,440 per year

expenses are $12,548 (includes tax, insurance, utilities, snow removal, landscaping and misc) based on 2012 tax return.

I’m estimating $5000/year towards capital reserves, and I’m planning to manage the park myself.

Assuming a 25% downpayment and a loan at 5.25% the loan payment will be app. $30,000 per year.

Based on this I come up with a cap rate of 9.6% and a cash-on-cash return of 10.8%

What do you all think?

I’m thinking 16 x $320 x 12 x .6 x 10 = $368,640 at a 10% cap rate. And that’s not allowing for most of the legitimate expenses you described, such as reserves. The expense ratio on a park is 30% to 40% normally – not the 20% the seller is claiming. On top of that, I would definitely do a test ad to see how deep this market really is. I think a park of this size would be more like a 12% cap purchase – so I think the price is about $150,000 too high at $455,000. Other questions I’d have is if it is city water/sewer and no master-metered gas or electric. If the answer is “no” to any of those, then it probably does not work at any price, being as small as it is.

Those are just some general ideas – obviously, I’ve never seen the park or the market.

Thanks for the input Frank, but I’m having a hard time understanding the 30% to 40% expense ratio you mention. I could see that if there were a lot of park owned MHs, but there are no park owned homes, no management expense (I live nearby and will be self-managing), and no amenities, so what expenses am I missing? I’ve seen the tax bill, insurance bill, and utility bills, and gotten quotes for snow removal and landscaping, so I don’t expect any surprises in these areas. It’s on city water/sewer and the gas and electric are not master-metered. I already own a multi-family building nearby and my expense ratio in that building is around 40%, but half of that is building maintenance and interior apartment repairs and upgrades.

What am I missing?

Let me prove it to you very simply. The seller is claiming $12,000 in expenses (which is 20%), right? You’ll break $12,000 with just the first four expense categories of property tax [in Texas at 2.5%, at the purchase price the tax alone would already be over $10,000, but even in Missouri it would be over $4,000], insurance [on a small park like this, you’ll still have to pay the minimum for at least $2 million in liability, plus workmen’s comp etc.] so that’s probably another $3,000, Manager [even at free lot rent only, you’re at $4,000], and repair and maintenance of around $4,000 per year. That still leaves you water/sewer, electric, advertising, phone, management fee, reserves, travel, etc. The industry norm is 30% if the tenant pays their own water and sewer and 40% if the park pays it. The lowest expense ratio I’ve ever seen is 15%, and that’s in a large, institutional grade park where the park resident pays the water, sewer, trash and all utilities directly to the provider, and the city owns the roads. Small parks, due to the lack of volume, always have higher expenses than large parks due to minimum charges (like insurance). So there’s no way you’re going to beat 30% to 40% expenses with this park.

I also think the expenses sound low, but you say you’ve seen the tax return. The seller is probably on a cash basis so they can front-load expenses into 2011 to leave the 2012 tax return cleaner. Or postpone paying expenses into 2013 to avoid reporting them on 2012 tax return. Or they can be fudging their taxes.

You really want to get quotes for the insurance YOU would carry and see how the taxes are assessed by the county and/or city. You’re figuring your own cost of management at $0. But your time is worth something and 10% cash on cash isn’t really very much when you figure it’s supposed to be your capital return and pay you for your time too.

Also, you have included a pretty agressive loan – 75% LTV with 5.25% rate – is that a firm commitment? It’s a great rate for such a small park if you have heard it from the bank. But when it’s time to purchase you might find that it turns into 65% LTV at 5.75% or higher.

Expenses you might be missing: You might figure some capital reserves into the cap rate, not hold them out separately. I think $1k per year would be about right. The tax assessment may change when the property is sold, which will raise the taxes due. You need to get your own insurance quote. What about professional fees (accounting, bookkeeping?). Ask to see the actual utility bills, not the tax returns. The little things make a big difference on such a small park – if you’re going to bill back a phone line to the park, that will be what, $600 per year at least? That adds 5% to the expenses right there. And, if it were me, I would figure a management fee (you don’t have to actually pay yourself but you should value it when bidding on the park).

Oh, and you will inevitably have some vacancy loss – the bank will automatically figure at least 5% vacancy loss when valuing the park.

Add all that up, and show the seller that at a 12% cap rate (not unreasonable for a small park), the price should be a lot lower. It sounds like you could get a better price and the seller is likely not going to find a buyer at the price they’re asking.


For a discussion of missing expense categories and what your expenses might actually look like, please see the thread in this forum entitled ‘1st mobile home park Need Advice.’