Thoughts on this deal?

I have agreed upon these terms for a park in the midwest: $135k purchase price, $30k down, 5% interest rate (seller financed) over 25 years with a 2 year balloon.

  1. 26 lots with 13 currently occupied. I will have $25k leftover to bring in homes.

  2. All owner occupied with lot rent at $125. Average lot rent for parks in the area is about $160.

  3. Town of 6k, in a metro area of 400k.

  4. Median single family home price is 90k.

  5. Unemployment is 8%

  6. I did a test add on Craiglist and received 5 email responses in the first two days and nothing for the week after that.

I am most concerned with item 1 and 6. Any thought on this deal?

I forgot to mention all utilities are city and direct billed.

13 x $125 x 12 x .5 x 10 = $97,500. You’re paying about $40,000 more than it is worth on face value, but you can probably rationalize that by raising the rent day one to 13 x $160 x 12 x .5 x 10 = $124,800. That’s within striking distance of the price, and the bulk of the upside of the deal is in filling the remaining lots, particularly in light of the seller carry.

However, the seller carry in this deal is lousy. A two year balloon will not work. More like 10 year. If you are going to overpay at the front of this deal by $40,000, then he needs to understand that you are doing him a favor as much or more as he is doing you a favor, and a 2 year balloon is not going to cut it – not at all. You need time to fill the park to at least 80% occupancy, and then will need three years of steady financials to get a bank loan – and that’s going to require around 7 to 10 years. If he won’t give you at least 10 years, then the deal is dead, in my opinion.

You also need to understand the capital requirements required to fill those last 8 homes needed to hit 80%. That will cost you about 8 x $25,000 = $200,000, and that’s in all cash. I’m not sure that you want to stick this much money in a deal that small.

As far as your test ad – it is totally flawed. You need to put the ad in the metro newspaper for that 400,000 readership. Craigslist is OK, but it is the weak sister to the metro newspaper classified ad.

Thank you Frank. Couple more questions:

  1. As a first time park buyer with $60k in cash, what kind of deals do you think I should be looking for?

  2. I was budgeting $12k for buying and moving in homes, is that unreasonable? Could I go even lower than $12k?

You might be able to hit $12,000 on a few homes, but the reality is that to hit $12,000 you’ll have to buy a home for $7,000 that is immaculate and then spend $5,000 to move it, set it, skirt it, hook it up and put stairs and an A/C on it. Many homes that you can buy for $7,000 are going to need around $5,000 of renovations before you can sell them. That would take you to $17,000. And it’s hard to find a decent repo for $7,000. That’s why I was using $25,000 as an average.

If you have $60,000 in cash, you’ll want to hold back at least $20,000 for a rainy day, which gives you a budget of $40,000. You’ll want to find a mom & pop deal with 20% down and seller financing, more than likely. That gives you a park price range of $200,000. And you’ll try to find a turnaround for around $10,000 per lot, so that’s a 20 space park.

The deal you have is right on the mark except for 1) it has too much vacancy (imagine the same deal at 80% occupancy and 2) the seller’s note is too short at 2 years.

How could you make your existing deal work? 1) Get him to go from 2 years to 10 (get at least 7 if you can) and 2) Convince him to carry 100% if you agree to bring in 2 homes with our $30,000 and make those collateral on the loan. That way you’re only 6 homes shy of where you need to be. Then be the world’s greatest home shopper and buy two more homes with your next $20,000 (you’ll have to be one heck of a home buyer). Now you’re only 4 shy. Go out and find a Lonnie dealer who will bring those final four homes, or raid another park and get 4 people to move if you pay for their moving cost, or see if you can bring in 4 RVs under your city permit.

Don’t give up on your existing deal yet – try to renegotiate from a dog deal to a great deal.

Frank, thank you for your wisdom and time in helping me. I will not give up on the deal, but I do have another park that might be a better option and I have some questions about it. First here are the details of park #2:

  1. 18 lots with 16 currently occupied.

  2. All owner occupied with lot rent at $220, which according to the broker is about average for the area.

  3. All city utilities, paid directly

  4. Town of 600 in a metro area of 70,000. Walmart 3 miles away in a town of 8000

  5. Median single family home price is $162k

  6. Unemployment is 3.8%

The seller is asking $269k and wants $120k down if he finances. The seller is retiring and moving to South America and is really concerned that if he seller finances he will : A. get the park back and B. it will be a mess if he gets it back. Between my business partner and I we only have a total of 60k in cash to work with.

Do you think this park is good and a better option than the 1st park?

Do you have any ideas on how we can convince this seller that doing a seller financing deal with us is safe? And, how do we convince him to accept probably 1/3 of what he is asking for on the down payment?

16 x $220 x .6 x 10 = $211,200. You can’t come near to his asking price. And I would not put down more than 20% on this deal which is $40,000.

I like the first deal better – it has upside. This one has no upside at all.