Posted by Ed Garcia on March 11, 2000 at 13:48:23:
Ray Alcorn, you finally impressed me. Well said?..
Ray,
Not only did you finally impress me, but you’re going to get from me what you have
asked me to do for a long time.
Just say I agree.
Ray’
I AGREE??.
(smile)
Ed Garcia
P.S. Please don’t tell me that this only took you 15 minutes to write, please don’t tell me.
If it did, then lie to me. (smile)
Arrriving at value of Parks that are not…(Ray, u out there?) - Posted by David Alexander
Posted by David Alexander on March 09, 2000 at 14:56:56:
fully rented. How do you arrive at the value of a park that is say 10% full in a good area. Newly completed park, 90 units, 10% full, and rents will are going for around a 150 month, assuming 35% expenses. I’m used to valuing everything on cashflow or potential from my work of selling something or creating the note when I know how what it will sell for. I mean that’s what you do with houses, MH’s… You scrape off the dirt and shine up the penny and realize it (actually know going in) that it’s a worth more than it’s face, because maybe the date makes it rare.
Ray, tells me to buy based on their numbers, and I know I dont know enough yet. But their has to be a value based on your time, no matter how much I hate to admit that. Because I can see deals that you cant buy based on their numbers, because the demand is greater for the lots than what they have created because of lousy management, and the numbers they are showing.
So, with that said Is there a rule of thumb for empty spaces, and your effort and work hence forth. I mean if I can put the deals together, people together, numbers together make a few dollars, and remain a B, using nothing more than my brain, why not?
What about a rule of thumb for fixing parks say having to remove older homes to put new ones in, that would have to detract from the amount you would pay per lot.
Ray, dont shoot me just realize I’m frustrated in my quest for a park.
David Alexander
P.S. I know, I dont know what I dont know.
Re: Arrriving at value of Parks that are not…(Ray, u out there?) - Posted by Ed Garcia
Posted by Ed Garcia on March 11, 2000 at 11:25:43:
David,
In all fairness to everyone who is trying to help you, we don’t have enough information.
If you’re not confused by now, I’m surprised.
The one thing I know for sure is you don’t have an answer on this board that is helpful
to you or workable. Again, no fault of us participants, it’s just we don’t have enough
information to advise you.
David, anybody that can drink in a bar, as much as I can, I consider a friend. You have
Proven yourself worthy of that task.(smile)
I know how to work this deal. If you would like some help, you can call me, you’ve got the
number. I would be glad to help you with your deal.
Ed Garcia
Re: Arrriving at value of Parks that are not…(Ray, u out there?) - Posted by JPiper
Posted by JPiper on March 10, 2000 at 18:49:05:
David:
As you undoubtedly know, I know absolutely nothing about mobile home parks.
But, the way I would approach this is that I would first arrive at a market cap rate for a fully occupied park of this type, based on a pro forma. This would be the ultimate value after “lease-up” or perhaps the sales price to a new buyer.
Then I would establish the value of land, the cost of subdividing (if that’s what it’s called in mobile home parks), the cost of any improvements that have been made to the park so far, etc. This would be the ballpark number that I would be looking at as the current value of the park.
Then I would estimate my expenses to get the park from here to there…subtract that from the gross profit (the difference between the two prior numbers), and then look at the percentage return on my capital invested.
If that happened to be what I perceive as a worthwhile percentage return, then I would take a look at the capital necessary (the expenses necessary to get from here to there), and analyze whether or not financing would be likely.
My offer would revolve around the number I had arrived at in terms of the value of the land and existing improvements. Could be less if the cap rate projection didn’t provide enough upside. Could be more to reflect some entreprenuerial profit for the current owner if the cap rate value were extraordinary and if I felt my ability to finance were high.
Again, I know nothing about parks, but that’s how I would attempt to approach this deal.
JPiper
Re: Arrriving at value of Parks that are not…(Ray, u out there?) - Posted by JoeKaiser
Posted by JoeKaiser on March 10, 2000 at 02:20:19:
Having never purchased a mobile home park, I may not be qualified to answer here, but here goes . . .
Do we really care what it’s worth? What does “worth” have to do with anything at this point? All I want to know is how low I can get him to go, and once that number is arrived at, we’ll sit down and figure out if it works.
What I wouldn’t want to do is figure out that $250k is a good price and see if I could get it down to that number. I’d much rather hammer away until I was satisfied that he’d truely hit rock bottom, sign it up and then figure out what’s what.
I guess what I’m saying is I’d be more concerned about making the best possible deal at this point and less concerned about what the thing may be worth. They’ll be plenty of time to figure that out once the dust settles.
Joe
Okay… I give up! What’s it worth? - Posted by ray@lcorn
Posted by ray@lcorn on March 09, 2000 at 23:39:03:
David,
I should have known you’d come up with a deal like this! Okay, I’ll play. But we gotta have some intel…
How motivated is the seller? Is he having trouble carrying the park during lease-up? Is BK on the horizon? How much do they owe? Are they behind on payments? Is it assumable?
Go to the courthouse. Check the chain of title. Can you pull purchase prices in your town? How much did he pay for the land? Who financed it? Did he borrow for the development cost? From who? How much? What terms? Development money is often short term. Any mechanic’s liens? Any other judgements? Court cases? Taxes paid? Does he own other property? How deep are his pockets?
Dig up everything the records will tell you about the seller. Gotta know the lay of the land before planning manuevers.
It could be a deal, or not. You are right in surmising there is value in the potential. The question is how much risk and effort is involved in realizing that potential. In other words, what do you want to get paid for doing the work?
Your turn! 
ray
Re: Arrriving at value of Parks that are not…(Ray, u out there?) - Posted by David Alexander
Posted by David Alexander on March 10, 2000 at 21:50:25:
You guys make this stuff easy, that’s why I’m glad ya’ll are my friends, hopefully I never have to negotiate with ya’ll. For me, my style is more like Kaisers, get the best deal and then check it out to make sure it’s what you think it is. As I’ve been going after what I percieve as bigger deals I can feel my personality change, to reflect more of a “Omigish” and that’s not good. I think a middle of the road approach would serve me best, and with all y’alls help I think I’ll be there quickly and I’m gonna nab one of these deals down, and after that if I like it a few more, lol.
Thanks, to all your insights it has help me overcome some obstacle within myself.
David Alexander
Re: I don’t agree… - Posted by Ed Garcia
Posted by Ed Garcia on March 10, 2000 at 11:22:09:
Hi Joe,
Let me tell you why VALUE is important.
I’ve had this argument with an old friend of mine on many occasion. My friend say’s
what difference does the Cap Rate in the area mean when buying a deal.
By the way a Cap Rate is a indicator of the properties income. When purchasing
Commercial property, you’re buying an income steam, and the value of that property is
based on that income stream.
My friend say’s that he doesn’t care what anybody else is doing because it doesn’t
effect him, and his concern is if he is making what he wants, or if it’s the desired
Cap rate that he feels he needs when doing his deal, that’s really all that matters.
Not so.
Let me tell you why.
(1) Today, I’m buying, tomorrow, I may be selling.
Going from the old cliché (You Make Your Money On the Buy) I can’t lose site
that the day is going to come that I may be selling. And you never know when that
day may come. The only way your going to make that money on the buy, “is when you sell”.
A divorce, another deal that has come up that you would like to do that might be even
better than the one you’ve got, A cash flow problem you may have, any number of reasons
may cause you to sell unexpectedly.
(2) If need be, I can always borrower against it? Not if the VALUE isn’t there.
That’s the second part of the deal. I may want to re- finance it or sell it to someone else.
Now I’m limited to my moves. If the value isn’t there, not only can I not re-finance it, but may
have problems selling it, because my buyer may not be able to finance it.
I know, you’re going to say you can carry paper, " weak answer", It’s always better to consider
all circumstances when doing a deal. Besides, as I said before, you may need the cash, for what
ever reason.
By me knowing the Cap Rates being enjoyed in the area, that’s an indicator of the value a lender
will allow me or a buyer if I should sell, to borrow on it.
I asked my friend, What would you consider a Cap Rate that you would do a deal at?
My friend said, I wouldn’t do a deal less than a 12 Cap.
I said, what if you found a property that you really liked at a 12 Cap, and found out other similar
property in the area was at a 14 Cap, how would you feel? I saw my friend stop in his tracks, that
said it all.
Nobody, wants to buy above market, and that’s my point. If your not aware of the market, then
how will your deal stand up, if your deal has to compete in that market.
Joe, I could go on and tell you some personal experiences that I am currently having, to even prove
my point even more, but what’s the use. Believe me when I tell you Joe, VALUE mean everything.
So when you make the statement, Do we really care what it’s worth? What does “worth” have to do
with anything at this point?
Worth or Value has everything to do with it, with out knowing that, how would you know if it’s a
good deal or not?
How do I know what price I should be negotiating my deal to?
If it’s based on Cash Flow? The market can change, in this case the building of new low cost housing
could effect this park. A newer better Mobile home park could effect this park, by either preventing
you from filling the park, or increasing rents for cash flow.
So when buying a deal, I need an edge on the market.
Ray Alcorn states, …and that was my thinking behind asking the questions about the debt and lienholders.
I didn’t say it, but I figured we had to know how much was owed to who in order to figure out if it was even worth fooling with.
I agree with Ray, that’s important, because you know where the seller is coming from, and how much
room he may have in a deal.
But no matter what the seller owes, it still comes down to determining what it’s worth on today’s
market under it’s current condition. And the only way you can determine that is to go to the market it self.
The seller can own the property free and clear, but believe me if we can’t come to terms we don’t have
a deal. Now what do you think the seller is going to base his price on? I’ll tell you, his perception of the
market, and I promise you, it’s going to be on the high side.
If were going to negotiate a deal, we need to know the market and have that information at our beckon call.
That’s the only way we can disarm the seller, is to know the info and be on top of it, where we create doubt
as to the creditability of his own thinking.
Joe when you say, I guess what I’m saying is I’d be more concerned about making the best possible deal at this point and less concerned about what the thing may be worth. They’ll be plenty of time to figure that out once the dust settles.
I know where your coming from, except, that’s the move you make when you know you have a deal. Tie it
up and then worry about it later.
In this deal David is trying to make chicken salad out of chicken Sh*t, so why should he go through mental
masturbation, when he can cut to the chase and corner the guy now making a deal out of it going in.
If not, next case.
In closing Joe, I’d like to say, I enjoy your posts, and have heard nothing but good things about you,
so keep up the good work.
Take care,
Ed Garcia
Re: Arrriving at value of Parks that are not…(Ray, u out there?) - Posted by David Alexander
Posted by David Alexander on March 10, 2000 at 09:34:20:
Guess these being bigger deals to me have changed my way of thinking without realizing it, rather than handle them like I normally do with houses and Mh’s and get the best possible deal.
David Alexander
You are dead right, Joe… - Posted by ray@lcorn
Posted by ray@lcorn on March 10, 2000 at 08:53:03:
…and that was my thinking behind asking the questions about the debt and lienholders. I didn’t say it, but I figured we had to know how much was owed to who in order to figure out if it was even worth fooling with.
Thanks for zeroing David in on the right stuff,
ray
Wow… - Posted by David Alexander
Posted by David Alexander on March 10, 2000 at 24:26:10:
Leave to me to ignore the obvious things to look for and you point out with ease where to go, look and find.
Thank You, for making sense of my rambling and Kicking me in the A** with simple Plain sighted truth.
Ray, this wont be all for naught, one of the happiest days of my life will be when I buy a park or two, better yet will be when I tell you what I made on the deal.
Thanks,
David Alexander
Re: Arrriving at value of Parks - Posted by JPiper
Posted by JPiper on March 11, 2000 at 06:41:15:
Everyone has to do what works for them.
However, I’m at a loss as to how one “negotiates the best deal” until one has some clue of 1)value 2)what it costs to achieve value 3)a preliminary idea of the exit strategy and 4)some rough idea of a route to finance.
Those words “negotiate the best deal” sound fine until you confront the hard reality of the marketplace. Otherwise, you’re going to spend alot of time wasting your time pursuing deals that you’ve already made which later prove to be non-deals…and you are unable to renegotiate because now the seller is convinced that his deal is worth more. Granted, you can always walk away…but why not spend a little time upfront with a few calculations so that you have a CLUE what it is going to take to make the deal fly from your perspective.
Just don’t want to see any wheels falling off…or wheels spinning either David.
Just my opinion.
JPiper
Okay Ed, what’s it worth? - Posted by ray@lcorn
Posted by ray@lcorn on March 10, 2000 at 14:36:29:
First, there is no way you will ever accurately calculate the “cap rates enjoyed in the area.” You may recall that Mr. Piper thoroughly proved that point in Atlanta.
Second, even assuming that you did have some sort of market cap rate, what would you apply it to? The property has 11% occupancy. I think it would be safe to assume there is a $0 or less NOI. Say you think the cap should be 15%. What is a 0 or negative NOI divided by 15%? Answer: zero or less than zero. Will the seller pay you to take it? (Actually I have seen that happen.) So under your premise, would you apply a 15% cap on pro forma numbers? Why? Isn’t that paying the seller for the work you do?
Third, say you discover that parks in the market are selling at X amount per space. Would you then apply X times 90 spaces? Why? Again, that may tell you what to expect on exit, and it is certainly good info to have. But what does it tell you about what it’s worth now?
I think the only way to aproach the deal is to find out how cheaply it can be bought, then do some market research to estimate the time required to fill the park to a break even level. I call this the absorption rate. Once you determine the absorption rate then you can project cash flow, knowing it will be negative until you hit the break even occupancy ratio. That is calculated by dividing the sum of the annual operating expenses plus the debt service by the total annual potential income.
For example, say you found the park could be bought for $450T (I just pulled that number out of thin air). Let’s further assume a $50T down payment, with $400T financed at 9.5% for 15 years, which would be pretty typical terms. Debt service would be ~$50T per year. Assuming 90 lots at $150 per month would total potential income of $162T per year. Assuming a 35% expense ratio on full occupancy (the percentage will drop as the occupancy increases, and the actual dollar amount of expense will rise), the estimated expenses would be ~$57T. To calculate break even, add $57T expenses plus the $50T debt service equals $107T. $107T divided by $162T equals .66. Thus, the break even occupancy is 66%, or 59 spaces. Say the absorption rate is 4 per month, and we’re starting with 10 spaces occupied, then it will take 12.25 months to bring the park to break-even occupancy.
By utilizing a monthly forecasting budget, you can calculate the cash flow deficit leading up to the break even point. We budget our properties on an annual basis and are able to come within about 3% of actual performance. A turnaround or new fill scenario such as this will probably have an error rate of about 10% if you do all the homework. The key information is determining the correct absorption rate from extensive market research. When you total the cash flow deficits, plus the initial investment required, then you have the total invested. The question then is what rate of return you will accept on the invested funds, and how long you can stand the negative cash flow to get the return. The end value based on a cap rate is the pot of gold at the end of the rainbow, but if you go broke before it stops raining, what difference does it make?
As you can see, no where does a cap rate come into play at this point. Assuming the lot rent amount and the absorption rate is fairly accurate, the only real variable is the debt service, which relates directly to the sales price. If the guy owes $750T, then plug in the required loan terms and redo the break even analysis. You’ll quickly see that the real issue is how cheap it can be bought, regardless of what it would be worth at the end. Knowing that the market may support and end-value cap rate of some percentage is essential to plotting an exit strategy, when you sell, but irrelevant when evaluating whether you can survive to see the exit. If you’re going to lose money for two or three years trying to fill the park, then what difference does it make what the cap rate is when it’s full?
What Joe and I were both doing is cutting to the chase to determine whether to fish or cut bait. Know how much the guy owes, and who to, which tells you whether or not you may be able to discount the liens, and you know whether it is worth chasing now, or waiting for the foreclosure auction later.
Sorry to bury you in details, but you knew I had to respond!
ray
Re: I don’t agree… - Posted by Joe Kaiser
Posted by Joe Kaiser on March 10, 2000 at 13:07:48:
Ed, I think you confirmed my post.
I’m not saying value isn’t important. Certainly, it’s likely one of the very few things that really matter. What I’m saying, and the point you seem to be missing, is that actual value has little bearing on one’s ability to make the very best deal possible and in fact, sometimes knowing the value can hinder your ability to negotiate.
Again, if you’ve decided the place is a good value at $250k and that you’d snap it up at that figure, I suspect you won’t get it for any less, even though the seller may in fact be willing to sell for substantially less.
I’d much rather negotiate with the seller and know I’ve got him down to the absolute least amount he’d take, and then go figure out what the thing is valued at.
Again, value, of course, is important whenever you buy anything. I just don’t think it really matters much when a motivated seller, a motivated buyer, and a weasel clause are at the kitchen table.
Joe
Re: Arriving at value of any problem property - Posted by ray@lcorn
Posted by ray@lcorn on March 11, 2000 at 11:38:29:
Jim,
I agree with most of your comments. They are basically a restatement of the detailed break-even analysis I posted below. However I disagree with calculating present value based on the differential between a leased up “ultimate value” and a starting value calculated as replacement cost. I also feel you glossed over a critical step in determining the total cost of the investment.
While there is a necessity for having a beginning value for a property, replacement cost does not, in my opinion, reflect an accurate basis for judgement in this type of situation. It assumes that if given the opportunity to replace the project, one would. That is to say that a property that has experienced severe lease-up problems is likely a reflection of an overbuilt or stale market. Given the chance to undo the development, one would grab it, not replace it. Bankruptcy courts are littered with the remains of developers that misjudged markets. That is why an old saw in the development biz is that the second guy is the one who profits. Basing an offer on replacement cost would ignore this market reality. In that scenario, the replacement cost is irrelevant to the question of what the property is presently worth. The “worth” is in the potential for income, not the cost of the improvements.
A better approach, in my opinion, is to determine the lowest possible price at which the seller can and will effect a voluntary sale, the alternative being to wait for foreclosure or additional motivation. Determining how much is owed, and to whom, gives the investor an idea of what kind of situation is actually present. As Ed pointed out below, the property could be free and clear or have very a low amount of debt. In that case, the seller’s motivation will be considerably less than with a distressed lien. Determining the lowest price up front becomes then a matter of some sleuthing and talking with the seller. This price becomes the starting “value” whether rooted in reality or not, because that is what it takes to get the property at this time, and therefore the basis for the analysis of the deal. It could conceivably be above replacement cost, or well below it. In most cases I have seen where a property has experienced lease-up problems as severe as David’s example, replacement cost would be an overvaluation of the property in its current state.
The lowest possible price then, becomes the starting value in a methodology to calculate future returns, rather than going through the exercise of calculating replacement cost. The next step, not mentioned in your post above, would be to perform extensive market research in order to determine a realistic timeframe and budget to accomplish break even. The absorption rate is key to this calculation. That research will be essential to determining whether a “leased-up ultimate value” is even possible and more importantly, how long it will take, and at what cost. With an accurate absorption rate we can then derive an appropriate cap rate and NOI, and calculate an end value for a specific point in time. Present value to the investor then, as opposed to the seller’s cost of the improvements, is the product of a calculation for the net present value of the expected future cash flows, based on individual return requirements.
At that point, one may determine with much greater accuracy whether it is in fact a doable deal at the seller’s lowest price, based on the return requirements of the investor. In my experience, initially determining the seller’s lowest price does not constitute a “deal” that would later have to be undone. The due diligence process is routinely used to renegotiate initial contracts, and values often change radically once all factors are in evidence. Performing the calculations and research detailed above help the investor to pare down the time involved in determining whether a deal is even feasible. If the lowest possible price is in fact too high based on the investor’s research and return requirements, the seller can then decide whether to accept the results of the investor’s reasearch and adjust the price accordingly, or wait for another buyer. In the case of an overleveraged property, there may be no decision to be made on the part of the seller, and the investor would want to negotiate directly with the lender(s) involved to possibly “rescue” the property, armed with the facts of the market realities.
My reading of your post gave no mention of performing the critical market analysis required to accurately gauge the total investment, or the time required in achieving the end value. A fundamental task necessary for any investment strategy is to know the market you are operating in, or ignore it at your peril. I suspect this was an omission of convenience on your part rather than an oversight, because I know the value you place on market knowledge.
Great discussion, and I hope this is an indication that we have piqued your interest for income properties!
ray
Re: I agree Mr. Piper… nt - Posted by Ed Garcia
Posted by Ed Garcia on March 11, 2000 at 11:12:29:
nt
Re: Okay Ed, what’s it worth? - Posted by Ed Garcia
Posted by Ed Garcia on March 11, 2000 at 12:08:05:
Ray,
You did a nice job, and I understand where you’re coming from, but that’s not the way I
would work this deal. I’m not saying that everything you are doing based on the little
information we have on this deal doesn’t merit, but that’s not what I would do.
The reason I say that, is because I feel once we get all of the information, it won’t come down
to working it like you suggested. However I will agree your suggestion is a good one.
And there is no doubt that you are more than qualified to work a deal like this.
Ray, there is no doubt in my mind that you know how to work this deal every which way but Sunday.
But all fairness to everybody who is trying to help David, we just don’t have enough information
to intelligently discuss this deal.
If this Park has been 90% vacant for a short period of time? For example 6 months to a year.
And there is no real competition in the immediate area, then I could consider working it as Mr.
Piper suggested.
If the Park has been in it’s current condition for lets say 3 years or more, different ball game.
Then it would be worth the existing income, and everything else I would consider potential upside.
We could go back and look at it from the view point of land value+ the improvement making it
a Park.
Why speculate?
Ray, we both know there are many ways to look at this deal, but the bottom line is we need more info.
Ray, one more thing, I’d like to complement you on your post. It amazes me how fast you can
come up with as detailed post as you do, in just 15 or 20 minutes. It would take me hours to make a
post like yours, and to be honest, I still would have not said it like you.
What I like about your post is that it will make who ever reads it, THINK.
Ed Garcia
Re: I don’t agree… - Posted by Ed Garcia
Posted by Ed Garcia on March 11, 2000 at 13:34:03:
Joe,
I understood what you’re saying. I just didn’t want to lose sight of the fact that, Value is
important, because it’s a reference point of negotiating.
I agree, there are many ingredients in negotiating a deal other than Value, and you felt Value
was a mute point at that time.
It was the way you said it that concerned me. I wasn’t sure if others would interpret it the way
you intended, as simple as it was. For some reason it stuck me wrong, So I wanted to make
sure Value wasn’t swept under the carpet. Thanks for the clarification.
Ed Garcia