Re: Ray, please help - Posted by ray@lcorn
Posted by ray@lcorn on March 12, 2005 at 19:21:41:
db,
Last question first; the tax assessed value has little to do with the market value unless you know the underlying appraisal rationale for the specific taxing authority. Practice varies widely from state to state and even among jurisdictions in the same state. The one question you need to know is whether the assessed value and the tax due will be adjusted on the sales price. that affects the income and your going-in return.
Is this is a good deal? Well, that depends on your goals as an investor, as well as the investment plan and exit strategy for this particular property.
I see this as two properties, and would value each separately. The rationale is that the park has a value based on it’s present income, and the commercial lot has a value that would be determined somewhere between the depreciated replacement cost of the building and the raw land value; and the value based on the income a third party may pay to lease it. In your case you’re the lessee, so you have to determine if the premium you’re paying for the park is worth the extra value of the commercial lot and building.
Let’s say the price negotiates between your offer and their asking price, at $420,000. Say you structure the deal for a 75% bank loan at terms of 6%, 20 year am; and a 15% LTV seller note with the same terms (with perhaps a 3-5 year balloon).
Let’s assign a cap rate to the park (for more on how to do this see http://www.creonline.com/articles/art-216.html)…
In the little info you’ve supplied, my impression of the park is that it’s old, with small spaces (10 per acre), so it probably won’t hold newer, larger homes. That reduces the upside potential of the deal, unless you create upside in another way. You may decide to put homes on the spaces and sell them as Lonnie deals. The rents are fairly low ($116 per mo), so that leads me to think the market may be weak and it may take a while to accomplish the plan. So let’s say that the amount of risk and effort involved justify a 25% return on equity.
Using the derivative cap rate formula explained in the article referenced above, the cap rate required to accomplish those deal terms would be 10.24%. Using the income figures supplied of $33,836 (which has no maintenance expense and will likely be adjusted downward), the maximum value of the park is $330,000 (r). From that would be deducted any deferred maintenance or improvement cost that must be performed in the first year.
That means the implied value of the commercial lot and building is about $90,000. You gave no details as to size, condition or potential rent level the property would bring, so you’ll have to tell us if it’s worth that. Since you’re the user you could look at like you’re paying the debt service and return for this portion of the deal, about $768 per month ($90,000 x 10.24%).
That’s just one rationale for valuation. You could also evaluate the “as-vacant” value for a redevelopment scenario. At $420,000 you’re paying not quite $100,000 per acre. This could be a high premium or a steal, depending on what similarly situated land sells for in the area.
One last thought: Your deal structure contemplates a high level of leverage. If you check the debt service for the terms I assumed, it’s about $32,497 per year, leaving about $1,339 positive cash flow per year. That’s a razor thin margin, and indicates that you need to look at adjusting the loan terms, putting more equity in the deal, taking less return on equity, or paying less.
Hope that gives you some direction as to how to approach the deal.
ray