thoughts on sellers pricing parks at ARV? example: park in current state is worth only $350k, but when improved/infilled, would be closer to $1M. Current asking price is 1.1
What’s the best way to approach this conversation? Is it worth it?
I know one route I know of is to say that no bank will finance and ask for seller, but even with seller it’s still way over priced…
Take the ARV, then subtract the actual costs to do the repairs.
Then subtract the time and energy it will cost you to manage the whole deal.
$1.1MM - $500K in repairs.
Then subtract 20% of the $1.1MM for your time and effort.
$1.1MM-500K-220K= Current Market Value $360K.
These are just estimates.
One thing I like to say to sellers with a high-value expectations is this:
" Yes, this deal has a ton of upside, but it will also take a ton of work to get that upside. If you think it will be easy then go ahead and do it and call me when it’s all done. Then I will pay the full price."
I use a similar expression when I see a listing price based on “Pro-Forma” numbers.
“If you just fill the park and raise the rents then it’s worth like $2.5M…”
My reply: " If capturing all that value is so easy then why didn’t the seller do it? I have to get paid for my efforts".
One huge benefit of being in Real Estate is the appraised value is based on what the park is today. Not what it will be worth 20 years from now. I can see paying a little over the Current Day value if the upside is easy.
For example, I don’t mind paying $10K for an empty spot that once full is worth $100K. But I would not pay $80K for an empty spot.
Thank you so much for the rough formula, I was struggling to figure out the best way to approach it from a numbers standpoint.
And I agree, most of the time I will offer the rebuttal that I purchase parks based on current numbers, not potential. I love your response “If you think it will be easy then go ahead and do it and call me when it’s all done. Then I will pay the full price.”
Curious about your thoughts on valuing parks nowadays? Is Frank and Dave’s quick valuation still viable? (occupied and paying lots x lot rent x value multiplier of 70 or 60 based on who pays water)
I love that response too.
Yes, Frank and Dave’s formula works.
Just be cautious right now in this rising interest rate environment. Make sure you check with your lender for what Rate they will be lending to you. You don’t want to assume a 6% loan. The last quote I received for a deal was 7% money. 10/13/2022
If the Cap Rate and the Loan Rate are too close or worse inverted, then you will be looking at putting down significantly more money to cover the DSCR.
It’s better to rewrite that formula as:
Paying Lots x Lot rent x 12 x Expense Ratio = NOI
NOI / CAP Rate gives you your purchase price
F&D would say Expense = .6 if you’re paying and .7 if tenant pays
CAP Rate like SDGuy says needs to have a spread to the interest rate you’re getting. My last two deals I was quoted from two different banks 5.55% and 7.0% debt. I paid to lock in the 5.55% about 3 weeks ago. I can buy at an 8 CAP if I have 5.55% debt but not 7%!
very good point, what is a good spread between cap and loan rate?
If you can get 3% you won’t be disappointed. Obviously if there’s upside you can do less i.e. rent raises, bill back etc. Right now i see shopping centers for example trading at 7 caps and i know the debt is at 5.5-6% so it all depends on the asset
The spread really depends on each deal.
3% is great. The higher the better.
However, don’t be afraid to break this rule if you see an opportunity.
IE. Rents are below market and can easily be raised.
Vacancies that can be quickly filled etc.
how do you explain to the seller that home rent doesn’t count in the valuation? I would also be adding any POH to the value discount at 75%
If you do the math by assigning say 20% Cap rate to the home income (assuming 50% expense on the home rent portion) you’ll find you most likely come out to about 75% of the market value of the home.
Do what I did above for the lot rent, add in the 75% off market value like you are, and that’s it