An 80 year old widow is looking to sell the park her husband built back in 1969. It has 25 lots of which 9 are occupied. I’m told they are all family and have been there pretty much since the park was built. All homes are owned by tenants, they pay for electric which is metered. Lot rent is $195.
I got her P&L from a PM company that is managing the property for her. A couple things jump out.
High vacancy and Expenses range from 50-75%.
I spoke to the PM company about this. The water are failing and need to be replaced. The owner pays for water and she has about 30% of her expenses being spent on water. She patches leaks but the whole thing needs to be replaced. They haven’t attempted to move anyone into the park because of the issue with the water. They are getting me a quote to replace the lines and add meters to each lot. The PM estimated $30k and told the seller this cost would come directly off the purchase price.
The other issue is the asking price. They used an appraisal from 2006 to justify the $165k asking price.
So my thoughts on this park, based on what I have learned here (THANKS EVERYONE) is
9 x $195 x .3 x 12 x 10 = $63180 - $30000 = $33,180 offer
then fix the water lines and bill back water to tenants. I took the water cost out of the expenses provided and the expense ratio came to 70% for the past 4 years.
9 x $195 x .7 x 12 x 10 = $147,420 park value
On top of that I would need to evaluate rents (I’m guessing they can be raised) and work on moving people into the park (not as easy). Each new home raises value $16,380
I know it’s a small park, but it would be my first one. It seems like a pretty straight forward turn around. Besides convincing this 80 year old widow that her park while has potential, isn’t worth what she is asking.
So, my question is ‘Is my line of thinking correct?’
Here is the math for a park that pays water/sewer for it’s tenants:
9 pads x 195 lot rent x 60 = $105,300 value. That is great if you can then get this amount reduced by the repair cost for the water. Call American Leak Detection to come find your leaks. You definitely want to bill for water.
Your biggest issue will be finding financing:
Small parks do not appeal to lenders. Most look to put to use at least $300k. The ‘big boys’ like Wells Fargo won’t touch anything less than $2mm. So your only option will be local banks and (hopefully) seller carry. See if you can convince this lady to let you pay her more money over time by paying her interest on what you owe over 10 years.
Less than 80% occupancy is a deal-killer for many banks. Even if you could find a bank interested given the small size, the low occupancy may kill other financing options.
Given that none of your competitors to buy this park (if there are any) will be able to come up with cash, and that your exit opportunities will be limited for the very same reasons, you might drop the price to $90k or so. And offer to pay some reasonable interest (4%?) over the next 10 years on a 20-year amortization schedule.
You really need to buy Frank & Dave’s books off this website and come to the next bootcamp.
Do not communicate with the PM any further on negotiations. You risk having them steal the property away from you. Work directly with the seller or their financial advisor.
Personally I believe you could get this park for a song. The likely hood is that the present owner can not afford the money to upgrade the water. Whoever is managing her financial affairs is fully aware of this fact and is likely fearing a complete failure of the water system at some point in time.
Explain the situation to the financial advisor making sure he understands their will likely be no other buyers. Make two offers a low ball cash offer and a slightly higher VTB offer. You should be able to keep the price well under 90K (including water upgrades).
Let the seller mull over the offer and walk away if they do not accept. I would make sure going in that you will not be making any counter offers if they do not accept. If they reject let them know your offer stands. They may come to their senses and accept your offer a year down the road.
Based on the owners age you may even be able to buy this park from her estate at an even better price so be patient.
You should value the property at not more than what your expenses will be, which is the 60x or 70x multiple of monthly lot rent. That said, if the actual expenses are higher, and profits lower, you can use that fact to negotiate to a lower figure. But your math is not correct. You’ve come up with a value that is too high.
Take the monthly rent collected (e.g. you are ascribing $0 value to empty lots), multiply by 60 (since the park pays water/sewer) and that’s your value ==> $105.3k in this case.
Good luck, and read all the books offered on this website,
-jl-
P.S. I receive no compensation from anything sold on this website… unfortunately!