Putting a Value on POH's on RTO Contracts

Hello. I’m looking at a park that has 8 park-owned homes that are occupied and all on rent-to-own contracts. The payments for these homes are typically $100-$150 above the lot rents (i.e. lots rents are $350, so the tenants are paying in the range of $450-$500 each month for a duration of 3-4 years before they can take title to the home). Aside from the fact that these types of contracts are now illegal and would need to be replaced with a rent-credit program (please correct me if I’m wrong), what is the best way to value these homes/lots when calculating a purchase price?From my bootcamp notes I show that the value should be the lower of a) 75% of market value (and does this simply mean the replacement value of the home?), or b) 65% of the future note/rent-to-own payments. I was instead thinking of splitting up the value into two parts: taking the lot rent portion and applying a CAP to it as I would for the rest of the tenant-owned homes (since the lot rents can be realized in perpetuity), and then applying a discount rate to the future revenue stream of the remaining payments (i.e. payments above-and-beyond the lot rents) since there’s a definitely end to those additional payments. Does this make any sense? I feel that tenants on a rent-to-own contract are more stable tenants than pure renters since it’s harder for them to walk away from equity they’ve built up, so shouldn’t the value of the lots they are occupying be valued more closely to that of lots occupied by tenant-owned homes? I really appreciate your input!

What about the park owner seller keeping the homes and you just collect the pad rent?Rental homes can be a Pandora Box since a buyers is assuming risk that sometimes cannot be fully known at closing but a year later you might say WHY did I buy problems.

You can still execute the contracts.  You did not originate those notes so you shouldn’t have any issues.  On the valuation side, do CAP the lots, but the discount rate on the notes should be no more than about 25%-50%.  You didn’t screen these tenants/future owners and notes on mobile homes aren’t worth a whole heck of a lot.  If the seller takes issue with this, point him in the direction of a note buyer to get an idea of what the fair market value is on notes for mobile homes.  He always has the option to keep them too, as Carl said.

I would follow Carls suggestion of leaving the homes with the seller. Your offer should be only on the park and made clear you are not interested in the homes. As a negotiating tactic this sends a  clear message that you place no value on owing the homes. If they then insisting on including them in the deal you have the advantage knowing they do not want to be stuck with them. You then simply offer pennies on the dollar.These homes are more trouble that they are worth and you need to use them to your advantage in negotiations. If he keeps them great, if not make it clear to the seller you are doing him a favour by taking them off his hands. 

Thanks for the input - I really appreciate it!