How do you guys value “Potential” in a park?
For example, a seller tells you this park has the potential to do X per year, or they want 500K for vacant land, or very commonly…the park has 40 vacant pads and they assign a dollar value for the “potential.” I see this very commonly amongst sellers and brokers.
For me, “potential” is worth zero dollars on a purchase price. Unlocking true potential takes money (risk), time (years), effort (headache). You can take into account having 40 vacant pads in your purchase as “potential” upside, but its practically worth zero dollars.
Don’t overpay for “potential.” Ask the seller, “Why didn’t you unlock the potential?” You’ll commonly get a lame excuse.
The owners who do the work, reap the rewards.
Agreed…Potential is worth zero dollars and should not be capped. There might be land value and existing functional lots that do not need upgrading have a value as it costs between $10k-$25k to install infrastructure to each lot, but if the infrastructure is end-of-life then the only benefit you have to land that is best use as a MHP then the only benefit you have is a licensed lot with the cost to upgrade to come off as an expense on the purchase.
Potential does have value, but it takes capital and hard work to capture that value.
I like to say, " Yeah, you are right. This Park has tons of potential; that’s why I am here. I don’t want to pay the Seller for my hard work. We all know it will be a lot of work, and my efforts must be compensated. If it’s so easy, have the Seller do it and call me back when it’s done, and I’ll be happy to pay for it then."
I think it depends on how much you want the deal. If each lot is worth $50,000 when stabilized. Let’s say I need $20,000 to get it ready for a home and a home is going to cost me $60,000. Let’s say I will take a $10,000 loss on that home. So I’m all into the lot for $30,000 after selling the home for $50,000. That’s a 1.6 EM. I’ll make that trade if I’m confident I can sell a home or confident I can sell the park to someone willing to put a home on it.
Alternatively, if I have to hold the home on my books (POH), I’m all in on that lot for $80,000. But when I sell the park, if I can sell the home for even $40,000 I still made money. I’m all in for $40,000 but the improved lot is worth $50,000.
I think the question, though, is how much of that 1.6x would you be willing to pay to the seller as “value” for the potential?
Interesting thread. Two of my three parks were near empty when I found them… remember these conversations with the sellers.