Hello, I am talking with the Realtor of a seller who has installed sub meters for water and sewer but is not currently reading or billing for them…
"The property currently has sub meters but the owner is not reading nor charging for water and sewer. With lot rents well below market at $290, my proforma includes $30,000 of water and sewer income (using 70% of the expense, leaving the 30% for bad debt and leaks) This revenue stream is ready. So you will need to use this figure in your NOI."
Should I include this potential revenue stream in my valuation of the park?
Absolutely not. And the broker should know better. That being said, the broker’s only job in life is to get the best price for their client. In any event, the previous owner was likely using the meters as a way to identify problem tenants.
Deal making is all about give and take. You may need to pay for a little upside considering it’s so easy here. However, YOU still have to be the bad guy and YOU have to be the one starting the process of billing it back. To me that’s at least worth something (if not half) and there is no way you should completely give in to this broker’s ludicrous thought process.
Our experience has been that brokers’ only job in life is to get themselves paid. So I’d go to the broker with an offer that does not include that ‘easy stream of income’ in your valuation because it does not exist yet, and show the broker that you have financing and can close quickly and they’ll get their commission check quickly. Be the ‘bad guy’ but make it clear you are trying to buy the property at a fair price and get the broker paid ASAP, and that you’d like to buy more properties through the broker.
That should get them to take your offer to the seller and recommend they accept it.
As a South Carolina Licensed Real Estate Broker-In-Charge and Owner of a Real Estate Company I need to state that NOT all Brokers are in it for themselves.
In fact I currently have a real estate listing that has had 4 different offers on and I have been holding out for the best deal (highest price) for the Client (not me). This is an Estate Home where the Personal Representative lives out of state. I have personally cleaned the house (including the toilets and bathrooms). I have also arranged to have it power washed and painted.
I say the above not to pat myself on the back. I say it so that others will know that NOT all Brokers are bad .
Now having said the above you should NEVER base your Purchase Price on a proforma.
IF it is so easy to do “A, B & C” (ie…Billing Back the Water) and get all this “extra” money, why is the Current Owner not doing “A, B & C” NOW.
The items included in the proforma are important in terms of your potential upside.
However, your Purchase Price should be based on what the MHP is doing NOW.
If they are not sub metering and billing the water now, you should NOT pay for it.
Now should you throw some money into your Purchase Price for the meters already being installed (an improvement per say)? Sure…as that work and financial outlay has already been done. However, you will want to make sure that these meters actually work.
Purchase price should only be based on actual ROI. If seller is not charging for water or sewer… your offer should not consider that. Why meters were installed and not used is probably worth some discussion in due diligence just to make sure they work. At a 10% cap rate you will be adding 300k to the value of the park.
Installing meters and then claiming that the income stream is ready for immediate use is like making sure the vacant lot utilities are working and wanting you to pay for those lots being occupied. Anything that is not already income producing is not counted. However, if he wants to get those meters read and collected, and season that for a few months while extending your exam period, then you might be able to pay more.
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