21 Unit Mobile Home Park Purchase NEED ADVICE - Posted by Ruben (KCMO)

Real Estate Investing Real Estate Gurus
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Posted by Tony Colella on September 21, 2005 at 09:37:39:

Sure you should have some checks and balances to make certain that you have as many exit strategies as possible.

Remember the “Totality of Circumstances” we talk about. Our monthly NOI approach determines the value to us, and this is typically a very conservative figure but we still check this price with other factors to make certain that we have not overpaid in the event for example we get extremely favorable terms.

But also bear in mind that the banks and the buyers most often use the CAP rate formula to determine value. The do not use our conservative figures or our “pay yourself first approach.”

The banks don’t even discount the rent from park owned homes. They simply take the Gross Income, a small vacancy factor (less than what we use), subtract expenses and come to an annual Net Operating Income (before debt service).

They then divide the NOI by the CAP rate they feel is market (typically 10% in our area right now) and come up with a much larger value than ours. They consider this value to be market value for the park. In most cases, the park could not support itself at that price without large cash downpayments from the buyer.

Tony

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21 Unit Mobile Home Park Purchase NEED ADVICE - Posted by Ruben (KCMO)

Posted by Ruben (KCMO) on September 20, 2005 at 19:22:37:

First I want to thank Tony, Scott and Sandra on the Mobile Home Bood Camp. My only complaint was that it had to end. Now on to the deal. While I was at the boot camp my wife saw an add in the local paper for a 21 Unit Mobile Home park for sale. I called and the owner is selling due to health reasons.

The annual rent is 48,600 with the effective Gross Income of 43,740. Those numbers are with 14 park owned homes (10 filled, 3 vacent and 1 used as an office), 4 lots with homes owned by tenants so they only generate lot rents and 3 vacent lots (Only 2 usable 1 has trees that block its use). All income based on numbers provided by owner via phone only. Waiting for fax info on the rent roll.

The total expenses (Yes Tony and Scott including paying myself first) is 28,505 which leaves a NOI of 15,235 or 1270.00 a month for debt service. My numbers come to Max purchase price of 172,000.00 @ 8% interest 30 year amortization.

The asking price is 199,950.00. With the A,B,C offer approach I was thinking of 170,000.00 for all owner carry. 150,000.00 for 75,000.00 down (first mortgage via a bank) and 75,000.00 Owner carry 2nd (10% interest only with a 10 year ballon). Last offer all cash at 120,000.00.

Seller bought the property with a 70,000.00 note in 2003.

The issues with the property is that it is in a flood zone (right on the edge) which last flooded in 1986 (info from the city code enforcement and zoning office). Also this is a smaller town with only 6K in population and has been steady there for the last 7 years. 4 major companies in the area Halldeck (brake parts) Gate Rubber (vehicle hoses), Russell Stover (Candy) and Traymec (mechanical parts for vehicles). That along with a lot of service jobs like McDonald and a Wallmart a few miles out of town.

The current owner really did a good job cleaning up the park according to the code enforcement department. All homes older like Tony and Scotts parks that we saw. Looked at one of the rehabbs that is waiting for a tenant and it was good.

My biggest worry is the town. It is the county seat but I am worried about the jobs. Anyone out there own a park in an area like this. Nearest major town is 70 miles away with a bunch of smaller towns around it. Also am I off on a 30 year amortization on a Mobile Home Park. I have the cash for at least 20% down on highest price of 170,000.00

Please give me what you think of the deal

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Income documents - Posted by Philip

Posted by Philip on September 21, 2005 at 18:37:13:

Did you get the income documented from tax forms?

I have done the due diligence on 3 mh parks and once I looked at the tax forms…the income never got close to what the seller stated.

Revenues were lower, empties were higher, etc.

Just my Experience,

Philip

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Re: 21 Unit Mobile Home Park Purchase - Posted by Tony Colella

Posted by Tony Colella on September 20, 2005 at 22:43:15:

Hey Ruben,

Sounds like you are in the ballpark. If nothing else, look at this as training. This way you won’t become a motivated buyer.

You are on the right track and a drive through with your numbers per home will help firm up those quoted by the seller.

One note, commercial loans such as those made on mobile home parks are more likely to run 20 years instead of 30 so your payment will go up. Re-run those figures.

They A,B,C offer will hopefully ferret out what is most important to the seller and from there you can negiotiate in earnest.

Tony

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Re: 21 Unit Mobile Home Park Purchase NEED ADVICE - Posted by JeffB (MI)

Posted by JeffB (MI) on September 20, 2005 at 21:03:37:

How much do the lots alone rent for, versus the units where the park owns the home and rents both the home and lot together?

I’m curious what the experts will say here. One thing I still don’t quite understand after the boot camp is how you compare two different park deals where there is a different mix of park owned home vs. dirt rental only. I like Tony and Scott’s valuation method (sure beats cap rates) but it seems like there would be an adjustment necessary to estimate the the income on an apples-to-apples basis (ie, perhaps always assuming lot rent only for valuation purposes?).

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Re: Income documents - Posted by Tony Colella

Posted by Tony Colella on September 21, 2005 at 19:05:32:

That’s why we don’t use their numbers (unless they are less than our “as is” personal evaluation per unit).

Tony

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Re: 21 Unit Mobile Home Park Purchase - Posted by Tony Colella

Posted by Tony Colella on September 20, 2005 at 22:50:16:

We compare the different parks by simply driving through and deciding what amount we wish to receive as our profit (paying ourselves first) per home or lot. Lot rent only does not require as much. Newer homes turn over less for us etc.

Each person will have a different value per home and even that value will change over time.

You determine the value.

If you are looking at 2 parks, assign the numbers to each and then decide which deal is the best use of your time, investment and effort. Check it against the 3 legs of the stool if need be.

In most cases, no 2 deals are identical. There will be physical factors, location, income, upside potential, turn around costs, etc. that will vary greatly (not to mention the terms of the deal).

Tony

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Re: 21 Unit Mobile Home Park Purchase - Posted by JeffB (MI)

Posted by JeffB (MI) on September 21, 2005 at 08:10:00:

Tony,

I understand what you’re saying, and that we as investors determine the value. However, let’s say you go through this valuation process on a park where all homes are park-owned. Then determine, based on the NOI, what kind of mortgage the park can support. If that is the basis for determining how much to pay for the park, isn’t it quite possible that you’d overpay by a large amount relative to what the market will bear for this property?

What I’m trying to understand is, shouldn’t the investor use both a discounted cash flow approach AND a comparable approach as well, when determining value? I apologize if is a rhetorical question, sometimes I can be a little slow to understand!