This park listing just pushed me over the ledge. I am very lucky and thankful to have purchased a park in 2016 before this madness. But the plan was always to own multiple parks so like many of you I get frequent broker emails about parks for sale. I do not even bother to open half of them anymore and what I see has had me on the sidelines for quite some time now. I cant imagine being a first time buyer trying to enter the market right now.
My park is located in Minnesota so when I saw an email for a new listing located on the outskirts of a suburb of Minneapolis I was definitely interested and decided to check it out. Let me first just say at least this listing was priced and didnât just say offers due on this date. Every other listing I see the brokers want a notarized LOI hand delivered on horseback detailing why their suggested price guidance is absurdly low, which family member is head of a regional bank, how much they have pre-funded your account for an unknown purchase, what days you are available to wash their car, and a picture of your wife.
But like I said this park was priced which was nice. They are asking nearly $6 million for 62 lots @ $565 per month. First I google street viewed the park. Right off the bat this park is at the entrance of a landfill and scrap yard. Of the 62 homes in the park only 1 home looks to be a 1990âs or newer home, the other 61 all look to be older 70âs homes and not in good shape. The roads are in poor condition with potholes, standing water, and full of old uneven patches. Parking looks to be a big issue, and lots are on the smaller side. The park is serviced by private well water and aeration sewer. It is not an attractive park and it looks like there is some heavy lifting to do getting the homes and lots to be maintained properly. Finally, I think the $565 lot rent is fairly valued and I do not believe there is some huge increase ripe for the picking.
I did not bother to sign NDAâs and open the financials at this point but some quick math shows 62 lots x $565 x 12 = $420,360 gross income. Now I am sure the seller and broker claim a 15% expense ratio with obvious omissions of common expenses but using a more real world expense ratio of 40% that puts net income at $252,216. Making this park about a 4.3 Cap.
The previous broker listing I looked at a week earlier was a very nice 68 lot park in Florida located in my hometown which is coastal but middle class and small. Price guidance was $10 Million and after looking at the financials the park was netting something like $200,000 or less if I remember correctly.
Who is buying these parks at these prices? Am I looking at this wrong? Anyone else just deleting broker emails before even opening them?
I have also lost complete interest in broker listings for the most part. They are simply way too overpriced and pricing doesnât follow business sense. You also cannot negotiate because thereâs always some other buyer who will take it as-is with ridiculous terms.
Market will only cool down if people actually stop buying. But alas, people areâŠ
Off-market is the only way to go. Build relationships with local owners and talk to people.
I also want you to consider this: Right now you can get a 10 year fixed loan for 3%. Basically, free money.
So large investors who see a $10.00MM deal are willing to put in $3.0MM (30% down) at a 5% cap rate because they will make the difference in yield from the Cap rate and the loan rate for the whole loan amount.
Call it a 5% Cap park. You put down $3.0MM. You get a 5% return on the downpayment. Plus you get the 2% return (assume a 3% loan) on the Loan Balance.
$3.0MM x 5% is $150K
$7.0MM x 2% is $140K
$290K total return on a $3.0MM investment. 9.6%
Where else are you going to get a return like that? Not to mention with the Trump Tax cuts you will likely get a first-year bonus depreciation of $7-8MM. Sounds pretty tempting to me.
If you have a bunch of other parks that youâve owned for years the tax shelter is likely needed. With Biden proposing raising Capital Gains tax to roughly 50% and him trying to eliminate 1031âs ⊠Things will get pretty rough over the next few years tax-wise if Biden gets his way.
Buy now as Tax Shelter and Taxes will likely eat you alive over the next few years.
If you think you are overpaying now you are probably correct. However, with all the Stimulus money and government spending going on inflation is likely to be high over the next 10 years. High inflation means higher rents.
The Big guys are locking in their tax shelter, fixing their capital Costs, and waiting for inflation to kick in.
Loved the âriding on horsebackâ line! I too have been asking that question for the past 2 years. I am a new potential MHP owner or partner who has to buy a cheaper one to make a first deal happen. These prices will definitely make me wait until the market resets.
The number 1 issue we have with brokers is (Kevan E. included) simply failing to indicate a selling price
With a price stated at least we do not need to waste our time or the brokerâs time. If you list a park for sale PLEASE state a price. SDGuy has given excellent information. We sold a questionable park 9 months agoâindicated a price and no haggling. Buyer was just trying to get to $10,000,000 to do a hud loan at 3% with interest payments only for 7 or 10 years. We are still buying parks but our last 1031 was completed with a 6% NNN with Dollar General with nice monthly checks. Yes, if 1031 are vanquished and capital taxes increased thank the president for tenants seeing large increasesâno real free lunches. If profits become criminal I will not work to own or operate parks!!
I am a broker in Texas; have been since the late 80âs.
I donât âpracticeâ as a broker, unless I need to, but am an investor looking for small MF, SF, MHP.
I totally agree with all the comments. Even in my brokering days (at that time I specialized in senior housing ie nursing home, assisted) when times are good most brokers would take on listings with ridiculous prices. Some suggested the high price to get the listing, others because they were inexperienced. I have no respect for those guys & gals.
I too ignore these ridiculous offerings. However there are buyers paying these prices. IMO its because there is so much stupid cash out there. Investors have to put their money somewhere besides a 1% CD or MM.
Based upon past experience there will be buyers that down the road, sooner than later, will be ready to sell because they paid too much & want to cut their losses or lose their property in foreclosure.
Also I see LOTS of sellers that think they have the âonlyâ property with âgold door knobsâ & wonât be realistic about selling price. To those sellers - they are not really motivated.
I just move on.
I hear ya, itâs a total waste of my time to look at broker listings. I am so thankful to have 4 parks bought and the 5th under contract. All off market. SD Guy is spot on, different people and groups have different cost of capital and expectation for returns. Work hard at off market deals and buy right or donât buy.
I would agree wholeheartedly and would say especially on the smaller parks the asking prices seem a little bit unreasonable. A 5-6% cap for a <40 space park in rural town without metro seems to me like overpaying.
I also would agree with @Snaponcatmech to work the off-market deals, and buy right or donât buy.
While I think the market is hot right now, Iâd like to add some food for thought.
If you buy on market, you can sell on market. Pricing theoretically should always be higher on market. The real question is if I buy at a 6% cap today, what can I sell it for tomorrow? And second, how high can I drive my 6% cap? Sure, itâs nice to buy at a 8% cap and sell at a 7% cap, but if I can buy at a 6% cap, increase that to a 9% cap and sell at a 6.5% cap on market, Iâll still make a lot of money. I think this thought process works better if youâre IRR driven over cash on cash driven. MHPs are the only area of real estate Iâm aware of that people will assume they sell at a lower cap rate than they bought at.
Also on low cap rates, we all like MHPs because they are relatively low risk for high returns. I would argue they are safer investments than an apartment building. So shouldnât they trade at cap rates equal to, or below, apartment buildings? Apartment buildings have been trading below 6% caps for quite some time. In my opinion, itâs only a matter of time MHPs trade consistently tighter. Especially as more institutional capital comes into the space.
Additionally, in regards to the high pricing, you also need to ask how many of the sales that youâre seeing by the brokers are sold to 1031 buyers. Those buyers will always pay significantly more.
If pricing is too high, we can always wait for the current set of buyers to not make the money they thought they would and scoop the parks up as people sell them and donât make what they thought they would.
I too have been asking that question for the past 2 years. I am a new potential MHP owner or partner who has to buy a cheaper one to make a first deal happen. These prices will definitely make me wait until the market resets.