What's wrong with this deal? - Posted by Chuck (AZ)

import · May 29, 2001, 6:40pm

Posted by Chuck (AZ) on July 09, 2001 at 16:54:11:

He seemed to be collected and cohearant. The only thing strange was the constantly changing story, the lack of records for the park, his refusal to release any personal financial info, and his desire to keep 30 junky (and empty) mobiles as rentals out of the deal.

My wife says she heard gears slipping.

In all honesty this park might be worth 1/10 of the asking price on a good day. Unfortunately it’s last good day was about 15 years ago.

The thing that caught my eye about this deal was the seemingly consistant cash-flow and the almost non-existant expenses. The numbers worked. However, the $10k monthly interest-only payments he’s making are draining the coffers and the park reflects that. The Wizard of Oz couldn’t save this place even if it was in Kansas.

I’ve come to two possible conclusions.

His partner did indeed mis-manage the parks funds. He was then forced to seek the $900k/14% hard money loan (out of Las Vegas no less). I think he may have compounded this mistake by using some of the funds to pay-off his personal debts… in effect placing a second on his home, and a lein against the park… which was probably still mortgaged at that time. They are now thus forever joined at the dotted line.
He had a bad run of luck at the craps table. The devil did a Rod Sterling walk-on with creepy music, and life went to hell in a handbasket faster than snow melts in Arizona.

Unfortunately, it looks like his wife will inherit this mess. I just hope she’s smart enough to have insured his sorry butt, and made pre-arranged plans to a more hospitable location upon his demise.

Guido will not be a happy camper.

import · May 29, 2001, 6:40pm

What’s wrong with this deal? - Posted by Chuck (AZ)

Posted by Chuck (AZ) on May 29, 2001 at 18:40:22:

Senerio -

259 space family park (to hell and gone from anything, truly in the middle of nowhere). 3 miles from a very small town (pop. under 1000), an hour to the city (pop. 500k). Access is by rural state highway.
Built in 1974.
Park owned water/sewer system.
Electric, cable, phone and natural gas billed by their providers.
50 and 60 ft deep lots.
No amenities, no improvements (un-paved internal roads).
No park-owned units.
50% occupancy rate / 50% vacancy rate.
60% of the tentants are employed by the same local company.
Current lot rent is $150/mo.
Monthly Expenses total $2000 (RE taxes, trash pick-up, water and sewer, insurance and miscellani).
Currently owner-managed.
Plans in place to bill for water, sewer, and trash pick-up (approx. $20/mo for all three services).
Current monthly net to owner - $19,000
Asking price - $1,975,000

So, what’s wrong with this deal? Don’t stop at the obvious…

import · June 12, 2001, 12:06pm

Re: What’s wrong with this deal? - Posted by Doris - Va.

Posted by Doris - Va. on June 12, 2001 at 12:06:12:

Chuck - I would say that in evaluating the offering price, you never consider potential income - only current income, even if you can see a way to increase the cash flow. Without doing the numbers, the price seems out of line.

Doris

import · June 8, 2001, 9:43pm

My God! The suspense! - Posted by Jason Bedunah

Posted by Jason Bedunah on June 08, 2001 at 21:43:56:

The suspense is killing me! What is it?

import · June 8, 2001, 3:55pm

Re: What’s wrong with this deal? - Posted by Douglas McDowell

Posted by Douglas McDowell on June 08, 2001 at 15:55:22:

Well as a complete newbie I’ll take a stab at the fact that 60% of tenants are employed at the same company. If there is little other industry in the area, your fortunes are completely tied to the company.

import · June 3, 2001, 11:14pm

Re: What’s wrong with this deal? - Posted by Tom_IN

Posted by Tom_IN on June 03, 2001 at 23:14:06:

I’ll tell you what is wrong. How about the FACT that the net is less than 1% of the asking price?

Tom

import · June 8, 2001, 8:15pm

Re: What’s wrong with this deal? - Posted by Chuck (AZ)

Posted by Chuck (AZ) on June 08, 2001 at 20:15:33:

Again, a correct answer… but your not looking deep enough.

The “problem” isn’t in the obvious details… it’s in the undiscovered opportunity. The “solution” requires a unconventional approach.

(Yes, that was a hint).

import · June 4, 2001, 10:04am

Re: What’s wrong with this deal? - Posted by Chuck (AZ)

Posted by Chuck (AZ) on June 04, 2001 at 10:04:36:

Your right… but it’s more than that.

(It’s a test guys…)

import · June 12, 2001, 11:14am

Re: What’s wrong with this deal? - Posted by Douglas McDowell

Posted by Douglas McDowell on June 12, 2001 at 11:14:45:

Chuck,
It’s a good mental exercize…I assume the answer to what your looking for is buried somewhere in the presentation, and not “but they’re about to build a major community next door” or “there’s gold on the land” or some other factor not included with the presented facts.

import · June 12, 2001, 2:28pm

Re: What’s wrong with this deal? - Posted by Chuck (AZ)

Posted by Chuck (AZ) on June 12, 2001 at 14:28:19:

Oh so close grasshopper…

The description that I gave I listed the facts as presented by the seller (there is no realtor/broker involved). The negatives are apparent… glaringly so, yet it has a $17k/mo. cash flow, after debt service of $2000/mo.

The “upside” isn’t apparent until the due diligance is done.

Yes, it has a 50% vacancy, and 60% of the tentants are employed by the same company (a mining operation), but it also has a 50% potential in-fill situtation. A natural gas plant is to be constructed in the same general area (this was not mentioned by the seller and he may not have knowledge of it). This will take up to 2 years to construct and local housing will be needed by the construction workers, and plant employees.

This would allow for potential Lonnie-deals, plus lot rent, on the 50% vacancy.

The park is 27 years old, and has it’s own water/sewer system. This “previous investment” constitutes the bulk of the seller’s asking price. Yes, it appears inflated, but that’s all the more reason to look closer at the deal.

There is a golf course less than 3 miles away. The park is located between the highway and a small lake… it has the potential to be a remote, yet quite nice, park… with a few improvements (community pool, clubhouse). It would also make a easy conversion to a RV park. So, even if the mine was to close, and the gas plant was put on hold, there is still a potential “upside”.

There is also an excellant K-12 school system in the area. The nearest city of any substance is an hour’s drive away… in fact there are 2 of them… each in opposite directions (one is the state capitol), and the small town close to the park has the usual small town amenities.

After looking at the numbers, I feel that a $50/mo. increase in lot rent would meet little resistance, which of course would include water/sewer/trash service. This would generate an additional $6350 a month income, without adding any additional tentants.

I’m thinking “net-lease with an option”… the lot rent increase would probably cover the lease payment without even touching the current cash flow or debt service.

Weather or not the option is exercised, will of course depend upon various factors (the upside) and time.

So… what’s wrong with this deal?

import · June 28, 2001, 12:58am

Re: What’s wrong with this deal? - Posted by what

Posted by what on June 28, 2001 at 24:58:36:

if you raise rent 33% you will have problems, these people look at that rent the same way we look at a $900 mtg payment, and if mine was raised to $1200 I would not stand for it

import · June 28, 2001, 1:51am

Re: What’s wrong with this deal? - Posted by Chuck (AZ)

Posted by Chuck (AZ) on June 28, 2001 at 01:51:15:

$200 a month is a fair market average. There are no lot-lease agreements at present. The park is near to where the tentants work, the next closest one is an hour away (yes, it’s in the boonies). They’ve been paying $150/mo. for the last 25 years. The park is 27 years old, and still has a first mortgage on it. The lot rental income is $19k/mo. The expenses are $2k/mo. The park is 50% vacant, and has been for 25 years. There are no amenities, the roads are not paved.

Can you tell me where all of that rental income went? Can you forsee infastructure repairs in the near future? Can you see the need for improvements and amenities? Do you understand why the rent needs to be raised now? Do you understand why a new owner would want to raise them? Do you really think they will move rather than pay the increase?

It would cost at least $4k to move their home to the closest park (an hour away), and they would face 2 hours on the road - one hour to work and one hour back each day.

The infastructure will need repair in the near future. Adding amenities (clubhouse/pool), and paving the roads will increase the parks value… not only for the owner for also for the tentant.

That extra $50/mo. will generate an additional $75,000 a year, without addding any additional homes/tentants. If your going to update the infastructure, the time to do it is before the roads are paved. If the park is finally filled to capacity (which actually has a chance of happening if the amenities are added), the numbers jump to over $50k a month in lot rents.

Think like a investor would.

import · July 9, 2001, 2:01pm

Re: What’s wrong with this deal? - Posted by Douglas McDowell

Posted by Douglas McDowell on July 09, 2001 at 14:01:47:

hmmm,
normally this would sound like a joke, but I’m really serious: Do you think the gentleman was still mentally ‘healthy’? Might explain the story changing 4 or 5 times while he’s talking to you.

import · June 30, 2001, 12:25pm

Re: What’s wrong with this deal? (long) - Posted by Chuck (AZ)

Posted by Chuck (AZ) on June 30, 2001 at 12:25:35:

I finally went and looked at this park yesterday. Up to this point I’ve been thinking and speaking about it based upon the listed details. I’ve spent the last 24 hours trying to make some sence of the reality of this situtation.

It turns out that the park was built on land owned by a copper mining company, to house their employees. At some point in the past, it went to private ownership. One of the partner’s in that deal, milked it to death, and the other partner had to do a financial jig to save his behind… or so the story goes.

This resulted in a hard money loan of $900k at 14%. The loan is 4 years old according to the owner (more like 14 from the looks of the place), and he’s been making interest-only payments of $10k/mo. for the term of it.

I can assure you that the hard money lender (if indeed he does exists) never saw this park. I later joked to the wife that the best possible use for it, was to put more junk on it.

Actually I was being somewhat serious. One home had lawn chairs hanging in a tree. Another tentant was running a auto-repair service is his yard. One home had all the siding ripped of one side off it. Half of the homes had no skirting. Most of them looked like a strong wind would fold them like a pretzel. Each occupied lot had a vacant lot on either side of it… this had the effect of making the whole park look trashy, instead of just half of it. The mental list I was making during this “tour” kept getting longer and longer. There were actually 2 homes, of the 127 occupied lots, that looked what I would term “decent”.

A hard money loan of $900k at 14%? …with 30 junky mobiles as security? …and a point broker doing the deal? No way, no how. I’d have filed bankruptcy first. The truth behind this is still a mystery to me.

It got worse.

While discussing the details of the park, the owner’s story kept changing. First he didn’t own any of the units (so the listing said). Then he stated on the phone that he owned 30 of them. Then later those 30 were lein’d into the hard money loan. Then later some of those 30 wern’t. Then to top it off, he wanted to keep those 30 for 2 years and pay lot rent on them as “his” rental units… some of them were in a state of repair, all were land-fill material.

While we were talking in his office, a couple of people came in to make payments. The owner had to run out to his truck to get a payment book. There was already one on his desk. Both payments were equal to a month’s lot rent each. Yep, two sets of books. He also admitted to using pocket accounting - the cash goes in one pocket and out the other. It’s safe to say neither hand knew what was going on.

The 70-ish owner didn’t come across as some “Goober”, he was clean shaven, decently dressed, soft spoken and somewhat professional in attitude. His mannerism wasn’t consistant with the pitiful condition of the park. On the surface he appeared to be a comfortably retired gentleman… the kind you’d see at the golf course, not at this dump of a MHP tinkering with junky homes.

He didn’t have a operating statement for the park. In fact he didn’t want to make one for me… “just use the numbers I gave you” and “the expenses have always been the same”, and so on. He also refused to release any of his personal financial info

When it came time to talk numbers these were the choices…

Pay-off the hard money loan, let the owner keep the 30 mobiles paying lot rent on them, and work out the differance.
Lease-option it with $100k down.
Be discrete and run like hell.

Oh yea.

The point to all this should be painfully clear. Do your due diliance.

I’m still at a loss to explain this situtation, but I think it safe to say that the IRS is somehow involved. The owner’s wife sounded “too desperate” on the phone during our initial inquiries. IF indeed he’s $900k down on this, it’s a debt he’ll never be able to repay… he won’t live long enough, and won’t make it back fast enough to do so. I pity his wife… she’ll inherit this mess by default when he’s gone.

No hope, no chance, no future.