Hi all. Long time reader, but I’ve never posted. I have been looking to buy my first MHP and I found an interesting opportunity. I am trying to decide a fair offer on an MHP near where I live. If you just do a rough income based valuation, it’s worth somewhere around $1.2 million. However, if you look at the city tax records, the property is assessed at just over $1.4 million.
So, how do I account for that in a valuation? The tax assessment is for the property alone, and does not take into consideration the revenue the park makes. Is my valuation an either or approach? Like, either property value or income approach, but not both? Or is there some expectation that I will consider the high property value in my offer?
It likely means the highest and best use isn’t a mobile home park right now based on the current income the park is generating. If home prices are too high, or it’s along a major highway, etc., it’s going to be hard to purchase it based on it’s valuation as an MHP. The owner likely knows the land itself has high value, and is going to want more.
Alternatively, it’s quite possible the municipality has assessed the value too high and the owner has never appealed it. The tax assessor office’s valuation is not usually in line with the market value. Assessor offices do some funky things when creating the value. It all depends on the municipality you are in.
I could point you to a few municipalities in NJ where the taxes have increased but the values shown are based on the 1990s pegged value.
If you were to purchase this park, I would contest the value in year 1 based on the lower purchase price to lower your tax bill. Never base your park valuation on the tax bill…unless of course it’s in your favor and you are trying to purchase at a lower price.
To do the tax appeal, contact a real estate lawyer who does them. Also you will find many of the real estate services firms such as CBRE, JLL, C&W, NKF etc. all have tax appeal practices you can contact. Many of these tax appeal practices are only paid based upon success fees. AKA if they don’t lower your bill, they don’t get paid. They are generally paid a portion of your savings. Many real estate investment institutions appeal real estate taxes yearly, and I highly suggest you do too. It’s another way to help keep costs lower if you win.
I’d like to offer a different perspective on this based on a fairly recent experience. The assessed value went up significantly for a park I bought at the end of 2018. When I spoke to the assessor about it, he told me he bases the assessment on the sale value of the park and the sale value of other parks in the area. We all know how much recent appreciation there has been in parks.
He does this by assigning a “per pad cost” and includes that in his final assessment. He said he included the value of the land and improvements, but also added this per pad cost to the equation. When I pointed out that his approach was contrary to state law, and buyers of parks are buying a revenue producing business not just land and improvements he said that I could challenge it but the review board simply refers back to him on questions of assessments. And I “was not likely” succeed. This is in southern MN.
I know in the past Frank has used the example of buying a McDonalds franchise, i.e., just because I pay $4 Million for the franchise location doesn’t mean the property value is $4 Million. The assessor did not agree with this analogy. He said I would have to take it to the state level court to have any hope of changing his assessment.
Very frustrating, I asked the MN manufactured home association to look into it, (MMHA) but it fell on deaf ears.
Assessors and assessments are municipality dependent. That is why it is imperative to properly underwrite your taxes when you purchase a park (or any real estate). It’s also why on your projected sale you should calculate the tax readjustment into your sale price as well.
It is possible for the actual value and the assessed value to be different. However, knowing that, one way you can think of valuing the asset is based on cash flow or based on the value of the land. These two options are mutually exclusive. For example if you were valuing it based on the cash flow then you are assuming It is a going concern and will continue to be a mobile home park which means you have to ignore the value of the raw land. The raw land, the homes, and the infrastructure are all necessary components to create the cash flow thus they are already valued using the cash flow method.
The other way is based on value of the land. In this case you assume that the park is dead and it will not be a going concern. If this method produces a value that is higher than the cash flow value, then the park is better off dead and then highest and best use would be for something other than a mobile home park.
Thanks everyone for the fantastic answers. I learned a great deal from each of you. So much knowledge here! I’ll keep searching, as I believe this one is out of my price range. Good luck to all of you!