Mobile Home Park valuation - Posted by Leonard

import · March 20, 2011, 7:58pm

Posted by Shawn Sisco on March 23, 2011 at 08:42:58:

I would imagine that most all-rental parks will lump all income together, but as you can see it is pretty convoluted when trying to get a handle on what is actually going on with the business. I use quickbooks software and set up a different class for MH rentals, it really helps to simply enter when checks are written/ deposits are made instead of trying to recall after the fact.

As for that rule of thumb, I think that it is about the best gauge available to set realistic goals for lot fee increases, and when buying to have that reality check, many have tried (some with success) to pump up the income and dump the property on an investor who doesn’t catch this trick, and what it amounts to is that in order to maintain their lot fee income, the investor will have to eat huge losses on home sales to keep the overall payment + lot fee in line with what the market dictates.

import · March 20, 2011, 7:58pm

Mobile Home Park valuation - Posted by Leonard

Posted by Leonard on March 20, 2011 at 19:58:40:

Hi All,
I just finished running the numbers on a mobile home park that has rental homes. After separating out the lot rent from the rental home income I get a negative Net Operating Income (NOI) using just the lot rents. I would normally use a cap rate and the NOI to get a value but I don’t know what to do when there’s nothing to cap? Obviously the park has some value but how to objectively get to that value?

This park only makes money with the rental income included. I’m not going to include rental home income in the NOI since I use the NOI and a cap rate to get a property value.

What do you do when the NOI is negative? How do I go about establishing a value? I hope that I’ve explained this situation clearly. Let me know if I haven’t. And thanks in advance for any and all responses!

import · March 20, 2011, 9:19pm

Re: Mobile Home Park valuation - Posted by Tony Colella

Posted by Tony Colella on March 20, 2011 at 21:19:04:

If you are willing to be a landlord (I am) then you place a value on the rental income.

I refuse to use formulas like CAP rates to determine a price. I prefer that actual, confirmed cash flow determine value AFTER I have been paid, expenses paid, taxes paid, reserves set aside and what is left over pays the mortgage which will dictate the price based upon negotiation of the mortgage terms.

Tony

import · March 21, 2011, 10:12am

Re: Mobile Home Park valuation - Posted by Leonard

Posted by Leonard on March 21, 2011 at 10:12:07:

Thanks Tony for the reply. Let me make sure I understand your approach. You use confirmed cash flow minus your management fees/salary, expenses, taxes and reserves. And then you arrive at a value based on negotiated mortgage terms that makes all the above work. Do I have that correct?

Some additional questions then. The rental homes are older; some (most) are past their ‘economic life expectancy’. How do you treat the rental income from these homes? Do you treat it the same as the lot rent? Why (or why not)?

Again, thanks for your reply and any others as well.

import · March 21, 2011, 11:24pm

Re: Mobile Home Park valuation - Posted by Dr. B. (OH)

Posted by Dr. B. (OH) on March 21, 2011 at 23:24:09:

Leonard,
Tony has said in the past, value the park on the lot rents (as you have done) then add in a cash value for each trailer. This is the tricky part, it depends.

If people in your area will rent sweetened 40 yr old 2BR 12-wides, then they may be worth more than in my area where almost no one wants one of those for more than a few months. So an $800 valued 12 wide might bring you $200/mo. (for the home) with an additional $1800 fix-up. On the other hand, as Tony also points out, what’s it going to cost you to get rid of that home and set up another one–even used?

In my area we are talking about $4160-$6460 NOT INCLUDING the cost of the home. That is:$1000-1200 to nix the old home, $0-1800 to prepare the old lot, $460 set-up permit, $2700-$3000 to disconnect, move, block and level, and reset with new skirting all with a licensed installer. Double wides are, of course, more.

Steve.

import · March 21, 2011, 10:18am

Re: Mobile Home Park valuation - Posted by Tony Colella

Posted by Tony Colella on March 21, 2011 at 10:18:24:

First I would look at the marketability of each home. Floor plan, # of bedrooms etc.

I have yet to find a mobile home that has passed its time other than it simply is too small or poorly arranged (floor plan).

You can rebuild, remodel and refresh these homes for less than you can buy a repo, move, set up, permit, inspect etc. but the home has to have the rental potential.

What one person is willing to manage a property for is different from another. It will also differ based upon how long you have been in the landlord game and how many properties you have. The longer you have been in the game you may want more money to manage and the more properties mean less time per unit which likely means you will want more net income per unit.

There is no right or wrong just what works for you.

If you view this property like a budget that you would have to balance at the end of each month you will likely find the best price you can pay for it and negotiate up to but not beyond that price.

Tony

import · March 22, 2011, 8:19am

Re: Mobile Home Park valuation - Posted by Leonard

Posted by Leonard on March 22, 2011 at 08:19:31:

Steve,
Thanks for the response! As you said, value based on lot rents and add some value for each trailer. Based on the supplied expenses the park has a negative cashflow when using just the lot rents. And there lies the question. How do you value a park when the lot rents minus expenses is negative?

The park has positive cashflow only when you include the used homes rents. Although I don’t plan to continue renting homes, the current income from the rentals is real money. Should this cashflow be valued, even though it’s based on used mobile homes? And if so, how much value?

I completely agree with your statements regarding the used homes. My idea would be to repair/remodel them and sell them with really good terms to persons with steady basic (low income) jobs. So the uses homes definitely have some value in my area. I’ve already run an ad to test the demand.

To summarize, here are the questions again:

How do you value a park when the lot rents minus expenses is negative?
Should this cashflow be valued, even though it’s based on used mobile homes? And if so, how much value?

And here are the main components that I’m currently thinking that have value in a park for sale:

-LOT RENTS
-USED MOBILE HOMES
-USED MOBILE HOMES RENTAL INCOME (however, not valued the same as lot rents)
-ADDITIONAL LOTS/LAND

I know I spewed out a lot here. Thanks for your patience and responses.

import · March 22, 2011, 8:15am

Re: Mobile Home Park valuation - Posted by Tony Colella

Posted by Tony Colella on March 22, 2011 at 08:15:14:

Actually that is not my method Dr.B but more a combination of methods.

My method was to approach the income (all the income). Do not use a CAP rate or Gross Rent Multiplier or other formula. Just a checkbook/income analysis but include the “pay yourself first” amount based upon the condition of the trailers and the work needed to keep them maintained.

Years ago I sat with Ernest Tew who’s method of using a CAP rate on the lot rent and then adding in a lonnie deal price on the home. The problem I suggested that was if you could not get the seller down this low you might need to factor in the cost of not just a Lonnie deal but rather the cost a home of that condition purchased as a repo, moved and set up etc. Now if the home was one you would pull out then the reverse would be true as it is an expense you will face.

Ernest agreed that the Lonnie deal price might not work. So instead of say $2k he might choose $8k which was more in the middle. You still want to buy LOW but you still need to buy.

Several years ago Ray Alcorn suggested that the park owned rental homes Never have any value. I felt this was incorrect because without the home he would not receive the lot rent.

The caution needed is to not combine different strategies. My strategy is simply looking at what you can reasonably expect to receive in income, what your expenses are, pay yourself before you pay the mortgage and the use what is left over as the amount that propety can pay on a mortgage and not a dime more. You can start low and negotiate up to this point or negotiate the mortgage terms.

Ray and Ernest were players on a much larger scale and to them a park owned home was a liability. For the smaller park player and those new to park ownership we are more likely than not to have to own at least some, if not all, the homes in the park.

Again there is no right or wrong, just whatever works for you.

I prefer the checkbook analysis because any error made is not compounded so much that it can sink you. I have seen folks analyze large parks and miss an expense which overstates the income which is the magnified through the valuation formula making the park appear that it makes far more money than it does and thus the buyer paying more than the park will support. Again, no right or wrong just what works.

Tony

import · March 22, 2011, 8:50am

Re: Mobile Home Park valuation - Posted by Shawn Sisco

Posted by Shawn Sisco on March 22, 2011 at 08:50:17:

Leonard, in order to give specific advice, we need specific information, this park that you are evaluating may well be a great money maker, or a money pit.

Since you have made it clear that lot rents alone won’t be profitable, I ask why not? Are rates under market value? - how much? if you were at market value, then how would the P&L look?
There is a rule of thumb that lot fees should approximate 1/3 the market price for 3 BR apartment - I’m talking about a good 3BR not substandard, but not beachfront luxury either.I think this should serve you well to quickly see if the park is in a viable market, or if it will only support lot fees if the homes are nearly free.

The next item that jumps off your post to me is the expenses. Are you counting home maintenance expenses against lot fees? If so, when you back those out what would that do to the P&L? Typically, (that means a pretty well run operation) apartment expense runs 50% of income and MHP lots have 30% expense ratio.

My guess is that the seller has never really cared how much lot fees are as they are focused on total rental rates, and thus never made accounting for the MH rental expenses and just lumped it all together.

import · March 22, 2011, 9:11am

I was talking about a different Tony - Posted by Dr. B. (OH)

Posted by Dr. B. (OH) on March 22, 2011 at 09:11:56:

Just Kidding.

Read my previous post eliminating any reference to “Tony”. When I evaluate a park, I evaluate it in 2 to three different ways including Tony’s “checkbook” method. Usually the values to me come out similarly. Except cap rates on small parks do lead to overvaluation. So I focus on the the most conservative (lowest) valuation, allowing more room for error.

Once again, it all depends… on what you want to do with the property. If you wanted to scrape it and put in a Lowe’s or Wal-Mart that would be a very different valuation from running a section 8 rental park, different from a 55+ park, different from lot-rent only family park, etc.

Steve

import · March 22, 2011, 8:45am

Re: Mobile Home Park valuation - Posted by Leonard

Posted by Leonard on March 22, 2011 at 08:45:34:

Tony,
Thanks again for your response and the expanded explanation! I really appreciate the background on how you arrived at your strategy. I may have some additional questions about it after running some numbers.

import · March 23, 2011, 2:33am

Re: Mobile Home Park valuation - Posted by Leonard

Posted by Leonard on March 23, 2011 at 02:33:52:

Hi Shawn,
You’ve brought up some interesting points. The lot rents are below market by at least $40-$50. The owner has focused on total rental rates as you suggested. The lot rent hasn’t changed since before 2007.

And I was making the mistake of including the rental home maintenance expenses against the lot rents. I will look at the numbers again with those expenses backed out. I’ll let you know what I come up with.

And thanks for the rule of thumb on lot rents; never heard that one before.

import · March 22, 2011, 9:17am

Re: I was talking about a different Tony - Posted by Tony Colella

Posted by Tony Colella on March 22, 2011 at 09:17:59:

I agree with Steve that it is wise to use more than one method to make sure you have not missed something and to use the lowest value.

Bear in mind that price is the MAX price you can pay so you have to start lower and adjust your negotiations.

Tony