MHP in Oklahoma - Posted by John

import · September 9, 2008, 6:57pm

Posted by Gary on September 13, 2008 at 09:29:25:

Know your market! Find out what the lot rents are in your target area. Buy a park that is at the lower end of that market. This will give your tenants the feeling of getting a good deal, even if the other parks are a little nicer. Then you can bump the rents and still be under the competition, who probally wouldn’t take your tenants older metal/metal home anyway.
I have developed a two page list of 40 questions I need to have answered when considering a park for purchase.A bad answer doesn’t mean I’m not interested, it just makes me aware of the future hassles I’ll be facing. Now I find it’s hard to buy something because the uneducated are outbidding me. Maybe I’ll get the park on the courthouse steps in a few years when they go to auction as in a 15 pad in a neighboring town I’m waiting on now. Gary

import · September 9, 2008, 6:57pm

Posted by John on September 09, 2008 at 18:57:38:

I have found a park. Here is the low down so far:

Owned 8 years - 29 units - 16 P/O homes. 3 empty lots and 7 empty P/O homes. Tenants pay electric and gas, park pays water. City sewer and water, owner states water bill is around 450 a month. Water lines and sewer lines are PVC. Lot rent is 125, very low for that market. The 9 remaining rentals are about 350 each. Latest land only appraisal is 265K, asking 320K. Selling due to personal issues. The property has highway frontage. I do have “Lonnie” deals in other parks and have had some great mentors on park management with some real world experience. Just looking for ideas or suggestions on putting together a deal, if there is one. You guys are the gurus here so please pick this apart.

Thanks,

import · September 23, 2008, 8:18pm

Re: MHP in Oklahoma - Posted by Gail

Posted by Gail on September 23, 2008 at 20:18:43:

How did this turn out for you John?

import · September 11, 2008, 2:12pm

Calling Troy, John Hyre & Rick G! - Posted by Penny (Coastal NC)

Posted by Penny (Coastal NC) on September 11, 2008 at 14:12:37:

Troy, John and Rick - thanks for your responses on this thread. It’s the kind of info I’ve been looking for.
Could you guys share your “formulas” and general rules for structuring a deal? I was all set to attend Tony and Scott’s recent boot camp - with plans to buy a park as soon as I could find the right deal. Unfortunately, I couldn’t attend and now find myself floundering around to determine how to accurately assess a MHP deal. My background is in SFR - and I’ve been kicking around running the numbers on apartment buildings but I don’t even know where to start with MHPs. Seems like there’s much more to it than cap rates. Can you share?

Thanks in advance
Penny

import · September 10, 2008, 10:12am

Re: MHP in Oklahoma - Posted by Troy (Tampa)

Posted by Troy (Tampa) on September 10, 2008 at 10:12:03:

Its worth about $140K based on current numbers. IMO you should never count rental income and only go by Lot rent and even if lot rent should be $200 and its currently $125. You can’t just increase the lot rent by 60% and expect A)Expet the tenants not to riot and B) it may be illegal to hike it that much.

You buy based on incoome, they may be selling based on land value + income + rental income, but it would be a mistake to buy based on what they highlight.
If I really wanted the park I would seperate the offers 1 for the park 1 for the homes, get the make and model of each park owned home and give it a value and ask the seller to hold the financing on that amount at a minimal rate, and offer $140K for the park itself. They won’t get $300K.
If they had 29 ocupied lots @ $200 per month it would be in the $300K range. If it was 100% occupied at current lot rent it would be worth $230K +/-.

import · September 10, 2008, 9:54am

Re: MHP in Oklahoma - Posted by John

Posted by John on September 10, 2008 at 09:54:08:

You guys are just awesome. I appreciate all of the input. I have put together some numbers and crunched them. I am seeing an off of 200 to 225 with 5% down for 20 years at 7%. She is not opposed to owner financing the deal. The homes are older and I have already set the stage with her in that regard. I am meeting with her next Friday to visit more extensivley at the park. I am going to do some due dilligence at the courthouse and other parks in the area. I know the market can hold 200 per month lot rent. I have other “lonnie” deals in a park about 7 miles away and they are 200 per month. This is a much nicer and safer location, it is also close to a lake. I will update you as to what I learn and I am sure I will be asking more questions as this continues. If I am not able to work a deal on this park it is FANTASTIC practice and experience.

Thanks again so much guys. I really do appreciate it.

import · September 10, 2008, 4:39am

Re: MHP in Oklahoma - Posted by John Hyre

Posted by John Hyre on September 10, 2008 at 04:39:38:

I like RickG’s approach, though I think he’s being very, very, very generous on value of homes. What could park be worth at correct rent, filled up (bearing in mind that I’m not looking to pay what it “could” be worth)? Let’s say local lot rents are $200. In that case, monthly gross = $5,800, yearly = $69,600. Park with city water & sewer in good shape runs @ 35% expense ratios, so annual operating income might equal $45,240. Small parks sell for higher cap rates than larger ones, let’s say 10% here. Filled up at correct lot rents, this thing is worth at very most $450,240…remember - at very generous most, AFTER the serious work of the turn-around.

The homes may add a bit of value - or actually be worth less than zero. The numbers above are very similar to what I see in my market (Indiana). To the extent that the homes are old 12x60 2BR metal that I need to tear down, they actually subtract from the value of the park. To the extent that the homes are decent 14x70 (esp. 3BR), that can be sold on notes, I would place a modest value on them, probably $5k or so each if they are decent enough that I do not need to replace them - I am not a fan of trying to rehab what will always be a dog, and tend be pretty pessimistic of true salvagability of homes.

For a park like this one in a $200 lot rent market where I can pass utilities through, I would be looking to pay @ $5,000 per lot, perhaps more, say $6,000 per lot if owner financing where in place or the park is in really good shape. I would then add/subtract based on the value/cost of tearing down homes. Just a very, very basic rule of thumb, subject to lots of caveats and detailed due dilligence.

John Hyre

import · September 9, 2008, 11:14pm

Re: MHP in Oklahoma - Posted by RickG (CA)

Posted by RickG (CA) on September 09, 2008 at 23:14:01:

Hello John,

I’ll take a crack at it. Now keep in mind that I am working on big parks, so small parks may not make sense in my numbers.

Here’s what I see - Two businesses: 1 - Lot Rent and 2 - POH Rentals. Both should be considered and calculated completely separate when valuing the investment.

Lot Rent Business

29 Total Lots minus (3 vacant lots + 7 vacant POH) = 19 lots collecting rent @ $125

19 x $125 = $1,125 p/mo = $13,500 p/yr.

The only expense figure you are giving is $5,400 p/yr on water. You aren’t listing taxes, insurance, deferred maintenance, advertising, trash removal, etc. So let’s say 50% expenses on this small park.

That would mean that your NOI on the lot rent only is $6,750.

So, at a generous 10% cap rate the Lot Rent business is worth $67,500.

On POH rentals you are not likely going to get a bank to loan you anything on those homes (I know from experience!). It’s a depreciating asset and you don’t have park ownership that would give them some confidence in taking a risk.

The way you would value that would be to take the wholesale price. In Oklahoma, I’d say that if you made that figure $8,000 you’d be very generous.

16 POH x $8,000 = $128,000

So, now let’s take a look at what this property is worth now that you have done the numbers:

Lot Rent Business - $67,500
Park Owned Homes - $128,000

TOTAL - $195,500

I don’t see how this property would be a good deal (to you that is). You’ll be upside down from the start. At best, the bank would loan you 80% LTV on the lot rent side of the business. I just spoke to a bank last week and they would not loan AT ALL on POHs. So you would have to fork out the remaining amount. Now your Cash-on-Cash return is affected even more since you have to put some serious cash down.

Let’s play out the POH rental to see how this deal works even if you were lucky enough to get some sort of loan on those homes:

POH Rentals

9 POH @ $225 ($350 - Lot rent $125=$225) = $2,025 p/mo. or $24,300 p/yr

Between repairs and maintenance, and vacancy adjustments, you’re looking at a 40% expense.

$24,300 minus 40% exp. = $14,580 NOI

Lot Rent Business = $6,750
POH Rental Business = $14,580

TOTAL NOI = $21,330

So $21,330 is what you would have left to pay debt. Remember that I’m just rounding a lot of the figures and it could be substantially less (or more).

Your debt service on a total note of $320K at 7% amortized over 20 yrs (due in 5) would be $29,771. So you would be upside down from the beginning even if you were able to find someone to loan you money on the park owned homes.

In my opinion, the seller is fishing. The only way this deal could work would be with some creative financing by the seller, and a huge adjustment on the price. Maybe a lease/option would be attractive so that you can build up vacancy and make the deal work.

I hope this makes sense. It’s late and I’m not sure I’m explaining everything right. More experienced minds will rightfully tear apart my figures.

Good luck and keep on searching. There are deals out there just waiting to happen.

import · September 11, 2008, 10:23pm

Re: Calling Troy, John Hyre & Rick G! - Posted by RickG (CA)

Posted by RickG (CA) on September 11, 2008 at 22:23:53:

Hello Penny,

You’ve got about as much background in real estate as I had (maybe even more) when I started my education in MHP last summer. So don’t fret, it will come.

I don’t know what specific formula I can give you. It’s really about understanding the business, then defining what your risk/reward parameters are in order to evaluate a park.

I would start by doing what you are already doing and asking more specific questions. I would also try to buy one or more courses to get your feet wet in MH “speek” and understand the dynamics that are at work in a MHP. I started by getting Ray Alcorn’s “The Dealmakers Guide To Mobile Home Parks”. Unfortunately, it is out of print, but I’m absolutely positive that Tony’s materials are excellent because he really knows his stuff. Getting Lonnie’s book is also an automatic buy and one that I enjoyed immensely.

Cap rates is a good place to start. I use it more as a weather vane to see where the economic winds are blowing on a certain property. But you’ll ALWAYS have to take that with a grain of salt since the numbers are NEVER right (unless it’s a Marcus & Millichamp listing who do a pretty solid job of presenting the numbers on properties).

I wouldn’t touch anything under a 10 cap. in this market. More intelligent investors than I who’ve I’ve associated myself with tell me that the pickings are going to get real good in the next 6-18 months. So you’re getting in at about the right time. Educate yourself as much as possible, learn from others, network, and go to as many events as you can to learn.

I know I’m a little thin on details, but I hope you find something useful in this.

Good luck!

import · September 10, 2008, 5:14am

Re: MHP in Oklahoma - Posted by Don-NY

Posted by Don-NY on September 10, 2008 at 05:14:15:

Rick,
In your lot rent formula you have 19X$125=$1,125? shouldn’t it be $2,375? X 12 = $28,500 X .5 = $14,250 10 cap = $142,500 lot rent value.

import · September 12, 2008, 2:12pm

Looking 4 magic formula! How to structure a deal? - Posted by Penny (Coastal NC)

Posted by Penny (Coastal NC) on September 12, 2008 at 14:12:16:

Rick,
Thanks for the reply - great advice!
When I started in the house flipping business four years ago, I thought I’d hit paydirt when I learned the 70% rule. I was hoping that assessing a MHP buy could become as routine as it can be for a house. Since I’ve learned the rules of thumb for buying and rehabbing houses, I’m now hoping to find something similar for parks.
For example, on this thread Troy mentioned making separate offers for the homes and the park. Who knew??? Then John went on to talk about expense ratios, max per lot cost based on projected rents and he mentioned costs for home acquistion and rehab. And of course, you shared a detailed analysis of the deal’s NOI, etc.
So I guess I’m looking for the basic rules of thumb. I have been looking for Ray Alcorn’s materials for some time. I just got Tony and Scott’s materials and if I may digress…let me tell you HOW I got them. I had signed up for their most recent boot camp and had tried to recruit everyone I could find from Wilmington to go with me. I rallied some troops and we were all set to go. Then my Dad got sick - hospice level sick. And Lisa, Scott and Tony were top-notch through out the whole ordeal. I couldn’t go to the boot camp. But they not only refunded my registration, they sent me their course materials. And I want thank them publicly. So thanks guys! I can’t wait to meet you at next years boot camp.
So now I’m working my way through their materials and am determined to lay the ground work for buying a great park. If anyone can share any rules of thumb used routinely in your business, it would be much appreciated.

~Penny

import · September 10, 2008, 8:51am

Re: MHP in Oklahoma - Posted by RickG (CA)

Posted by RickG (CA) on September 10, 2008 at 08:51:30:

Hello Don,

You’re absolutely right. Like I said, it was late and I guess I didn’t pay very good attention to what I was doing. Sounds like I pressed “9” instead of “19” on the calculator. Doh!

Here’s the message refigured:

Lot Rent Business

29 Total Lots minus (3 vacant lots + 7 vacant POH) = 19 lots collecting rent @ $125

19 x $125 = $2,375 p/mo = $28,500 p/yr.

The only expense figure you are giving is $5,400 p/yr on water. You aren’t listing taxes, insurance, deferred maintenance, advertising, trash removal, etc. So let’s say 50% expenses on this small park.

That would mean that your NOI on the lot rent only is $14,250.

So, at a generous 10% cap rate the Lot Rent business is worth $142,500.

In Oklahoma, I’d say that if you made that figure $8,000 you’d be very generous.

16 POH x $8,000 = $128,000

So, now let’s take a look at what this property is worth now that you have done the numbers:

Lot Rent Business - $142,500
Park Owned Homes - $128,000

TOTAL - $270,500

POH Rentals

9 POH @ $225 ($350 - Lot rent $125=$225) = $2,025 p/mo. or $24,300 p/yr

$24,300 minus 40% exp. = $14,580 NOI

Lot Rent Business = $14,250
POH Rental Business = $14,580

TOTAL NOI = $28,330

So $28,330 is what you would have left to pay debt. Remember that I’m just rounding a lot of the figures and it could be substantially less (or more).

Your debt service on a total note of $320K at 7% amortized over 20 yrs (due in 5) would be $29,771. So you would be upside down from the beginning even if you were able to find someone to loan you money on the park owned homes.

The corrected numbers may make it look more attractive, but it is still not priced right.

I know the Oklahoma market a little, so $150 is about the best you could hope for in a small park.

Thanks again for catching the mistake Don.