Posted by ray@lcorn on September 14, 1999 at 16:15:52:
Earl,
Let me try to respond to your questions and throw in a couple of comments for your consideration.
I think you have made a mistake in using the estimated NOI for the park with the income for the rental homes for purposes of valuation of the spaces. $50T/15%= $333T, but the question is whether the $50T is a valid number. Since it is offered by the agent, I have to assume that it includes the rental home income. To value the spaces, I would multiply 21x $225 (on the low side), times twelve, for a gross income of $56,700. Then subtract a 10% vacancy and collection loss, and an average expense ratio of 35%. That would yeild an NOI of $33,170. If a 15% cap rate is appropriate (in all the talk on the board recently about cap rates, no one has mentioned that determining the appropriate cap rate is as important than getting the arithmetic right) then the value of the spaces would be $221,130.
If the retail value of the mobile homes is $5T each, then Lonnie’s guidelines would be to pay no more than 50% of the retail value. Therefore the value of the homes would theoretically be $42,500, for a combined value of $263,630. However, I would take a hard look at the homes, considering age, size, appearance and condition, before committing to that value, and would also need a full background and documentation on the expenses for the park before agreeing that a 15% cap rate is an appropriate valuation factor. Owner financing would also affect my valuation for the property. It may well be that in order to realize the true upside in the property the homes should be replaced and other measures taken to reduce expenses. Without the information I just couldn’t say.
That the price has been reduced is a good sign, and you could benefit from the scenario proposed by JohnBoy below (BIG MONEY AND MOBILE HOME PARK! I NEED HELP AND ADVICE!) on a very similar deal. This assumes that the homes are in fair to good condition.
The preliminary info. on the MH park are as follows:
21 lots, 6 acres, 1 free home for park mgr., 3 mhs owned by residents- 2 w/ lot rent of $225/mo. & 1 @ $250/mo. The other 17 homes & lots are renting from $(400-750)/mo. The agent said the NOI is $50K (need to verify), but if I use a 15% cap rate the MH lots are worth $333K and if I ‘Lonnie’ out the 17 mhs @ $5K each for a total = $85K for the MHs. Then the max offer for the park and homes should be $418K, right?
The MHP was listed at $500K last month and now it is listed at $400K, so it appears that the owners may have some motivation. Are my numbers here out of line, is there anything else that I should consider when making or constructing an offer? Any comments or suggestions would be greatly appreciated?
Realtor listed deals stink - Posted by charles (del)
Posted by charles (del) on September 14, 1999 at 19:21:11:
You are suffering from the inaccurate belief that “if it is listed for $500K and I pay $400K then it is a good deal”.
I agree with with what Ray is saying. I feel that this park is worth maybe $200K WITH owner financing.
That tells you alot about realtor listed deals. It is listed for DOUBLE its value!!!
Why do I think it is $200k??
very very small park. Rented MH hassles and expense. Probably ALOT of hidden owner management costs.
Let’s remember that “cap rate” is a fancy term for “how much do I want to make on my money?”
For a park like this I want to make ALOT more than 15% return.
That is why you need owner financing and instant equity in a deal like this (so that you can make 50% to 100% or more on your cash and time investment).
I would suggest that it is a deal IF you can get your cash back within 2 years AND cover cash flow/ carrying costs and some equity to show for your work!