Sewer & Water lines

Hello,

I’m looking to purchase my first park. A small park with 7 Mhomes.

It was built in 1960’s and the water and sewer lines were put in then.

I believe sewer lines are PVC & Bormese(?) and water lines are galvanized (not sure what material).

The park is less than 1 acre in size, and has the sewer and water lines running

below. Are these reliable and strong enough type of materials to last over 50 years of usage?

What is the usual life time expectancy of water and sewer lines of these types? Also, what would it cost

to replace these lines if it were to fail or break? Thank you.

Those are great questions, but the person who needs to answer those is a certified plumber. You need to know the condition of those pipes currently, how much longer they might last, and the cost to replacement – all from somebody who can give you 100% accurate information and a bid to replace them if necessary.

In general, those type of pipes should hold up indefinitely – with consistent repair – but I don’t think your sewer line in 1960 would be PVC, but rather clay tile, so it may be that the sewer line has already been replaced.

Since it sounds like you are new to the business, just to keep you from getting in trouble, what is the lot rent and what is the purchase price?

Hello Frank,

Thank you for the quick reply.

The lot rent currently is close to $320.00. According to the seller, the state of Vermont comes out with a proposed max. rental increase which is

1% above the CPI. So it seems like the rent increase slightly every year. All homes are park owned and none of them are subleases.

The seller is currently asking $130,000. What do you think?

Quick formula: $320 [lot rent] x 7 [occupied lots] x 12 [months in a year] x .6 [assume 50% expense ratio because of small size] x 10 [ to get 10% cap rate] = $134,400. Pretty much your asking price is a 10% cap rate best case. That, however, does not include any value for the homes. If the homes are worth $10,000 each, then the economics of the deal just improved hugely, as the real price is $60,000 for the lots, which is more like a 20% cap rate.

The big issue on this deal would normally be 1) financing as it’s pretty small for a bank and 2) is the park too small to hit your goals. The exit strategy on a park this size is limited because most people want 30+ lots. Travel cost, for example, would be huge as a percentage of net income. These are the issues you need to really know.

Another important diligence issue is such things as the utility lines – things that will cost additional capital which will make your cap rate decrease.

Frank,

For a deal this small, what cap rate would be appealing to you as an investor/owner

To pursue a deal this size

Considering that this is your first park? Also, regarding my post above, the park does not own any mhomes. My mistake. Thank you.

What’s the financing on this? Is the seller carrying with a small amount down and non-recourse debt? What’s the market lot rent in the other parks?

Frank,

I havent discussed it completely yet, but the sellers

Seem quite willing to fianace a portion. The median lot rent according to the 2010 appraisal done by a certified appraiser was $320.00 in this subject county. Vacancy for mhome lot was 4.2%.

Far as being non-recourse, thats what i’d like to accomplish on the negotiations. However, if its a non-course, would they probably want to collaterize the remaining balance with some other assets?

First of all, don’t trust anything from an appraisal – those are often extremely off-base. Do your own diligence and get the comps yourself.

On the note, there are not 100 people looking at a deal like this. More like one – just you. The seller does not have the clout to get everything he wants. Typically, on a mobile home park deal that is seller carry, the note is always non-recourse. There is no additional collateral, just the park. You are probably doing him a favor in buying a park that small, so you actually hold more cards than he does.