We had a request by a client to bid for appraisal work on a package of parks. Most of the parks have POH’s, with at least one of the larger parks having more than 50% POH. In addition to financing the parks the lender wants all of the POH’s valued. Most of the parks we look at have minimal park owned homes and the lenders have always asked us not to include a value of the POH. Several questions:
- Any experience in having POH included in the appraisal with a park you purchased or refinanced?
- How were the POH’s valued (income based or sales comparison)?
- What type of expenses and cap rate would be typical on POH income?
- Is the cap rate of the park higher given a high percentage of POH?
IMHO you cannot cap POH income if you plan on selling them. Capping them into the purchase price is forever in terms of mortgage, but the income is very limited in scope and time.
Once the homes are paid off, your income goes down, but your mtg payment stays the same.
This is not even taking into account that the home portion of the rent has a very low profit margin. The lot portion is maybe 70% profit, while the home portion is maybe 30% if your lucky, plus it is finite meaning that it goes away after a set period of time.
If there is only one point that I really took to heart from Franks lessons is that POH’s are worth very little.
I agree with Coach. Don’t go down that road of applying a CAP rate to POHs.
Possibly the fairest way to evaluate the POHs is off of a comparable sales approach. I’ve never attempted to figure out how to get that data though and I’m guessing the DMV keeps up with that type of thing. This is just me, but since customers can’t really get conventional financing for most used mobile homes, you probably need to evaluate each home for what they would reasonably go for in an all cash sale. The lack of a financing market probably means that this number is likely between $2,000 and $8,000 for the majority of them.
I wrote an extensive post on this subject under the subject “POH is evil” – See POH is evil?
POH have zero value because it is in your best interest to sell these at minimal profit, or at cost. Why? Because if you’re going to get money, you want it in the form of lot rent and not the “ugly” homes business. The ugly homes business is a great deal of the whole savvy of the business and managing not to lose money rehabbing is a good trick.
The point is, the homes are worth what you can sell then for, after they are habitable and in a condition to appeal to your customer base. That applies for buying homes to bring in to your park as well. Hardly anyone else is going to do that for you.
That leaves you with a value yielding no profit so don’t calculate it in your valuation formula which is designed to valuate a (peaceful) income stream. To the extent your income stream is not “peaceful” that’s where you get a modification to the cap rate of the park to account for how much hassle it is relative to the amount of cash flow it generates.
Does that make sense?
Thanks everyone for the advice. I spoke with a park owner who told me that the POH keep the lots full, and after allocating out the lot rent, they basically break even on the home income. A lot of hassle to keep the park full, but in some markets that’s what it takes.
I seriously doubt it. It could be that he’s not familiar with the rent credit system and it never occurred to him to sell the homes.
POH’s are a huge hassle. I’d sell them. Sell them to the occupants, or if they won’t buy then boot them and sell it to someone else.
Not to mention, the sale-ability of the park will go up with no POH, and financing options will open up. It’s hard to finance with POH.