Advice on buying a MHP..what next? - Posted by Jim Schad

Posted by Eddie-MI on July 16, 2003 at 20:14:41:

Monthly gross revenue.

Now, some people only count lot rent and ignore the rental trailer income. I would count rental trailer income, unless the park was junk.

Advice on buying a MHP…what next? - Posted by Jim Schad

Posted by Jim Schad on July 15, 2003 at 08:15:11:

Need advice on how to proceed. Price of $275K, will put down $75K cash, seller carries back the $200K at 7% for 30 yrs. Seller wants to be cashed out in the near future so do we put a balloon due in a year, 5 years etc?

Should we do a lease option with a 2 year option or something like that?

What should closing costs be? Broker said maybe 1.5% of selling price as owner is carrying paper with no charges other than interest.

Need to do some due diligence! What is typically done? Is there a general check list from seller and city?

At what point do I get an attorney involved?

Should I buy it as a corp. or LLC or what?

I am looking for advice not insults pointing out my novice approach.

Thanks for any valuable input!

Evaluating Small Parks - Posted by Tony-VA/NC

Posted by Tony-VA/NC on July 15, 2003 at 10:22:12:

This is a cut and paste from a post I wrote some time ago.

Two places I would suggest you look for info in evaluating and investigating this park.

www.ernesttew.com

The link is :

http://www.ernesttew.com/MHP%20Income%20Analysis.htm

Ernest’s form (copy it and paste it directly into your excel spreadsheet)shows you how to break down income analysis of the park. Plug in the numbers that you derive from you due diligence in step #2.

  1. Go to Ray Alcorn’s “How to Article” here about Commercial investing due diligence

The link is:

Be sure to use only the verified, real numbers that you can locate yourself. Do Not rely upon realtor numbers or seller numbers. Tax returns etc. are a good place to start. Plug the confirmed numbers into step 1 and now you have a value. But what is this value?

To me this value represents a snap shot of what I will be faced with the day I buy the park.

From that day on, the park will have a different value.

If this is a turn around park, there will be low’s before there are highs. I must buy right so as to allow for this. I must have the money available to make improvements, pay debt service, boot bad tenants, rehab as necessary and re-let at market rates.

So what value works for whom? Banks probably like the first value described. They may also want fix up value. They will want the value of the land. They may want the value of re-buiding from the ground up. Will these all be the same? Not likely. Will any two appraisers come to the same figure? Do they ever?

So again, the value that is important to me is what my management and the market will bear.

PLEASE understand that we DO NOT BUY at that price!

We are investors. We Negotiate. I use the Seller’s numbers and perhaps the numbers I make adjustments for (such as predicting the eviction of X people and improvement costs etc.). Most important of all is that I must include a profit projection for myself. I then draw a line in the sand that says I must not buy for any more than this number.

Next, I look at where the Seller’s asking price stands. Do some investigating about the seller and the current financing. See what motivating factors the seller might be under and begin to solve those problems. Base the negotation and the numbers on that, not value numbers (in my opinion) except to never cross that line in the sand.

Price is not everything if the terms can be negotiated to make the deal work. But cash flow is cash flow so be sure that the net cash in your pocket remains at the number you drew as the line in the sand. Then look long term to decide what other exits these terms may bring to the table or eliminate.

For example, you don’t want to go too high in price, even with great owner carry terms because someday you will want to sell or refi and you may have eliminated your back end profits simply to acquire the park.

Conversly back end discounts may be a nice windfall. Just know what you are facing today and how it will impact the investment in the long term.

As for your questions about what legal entity to take title to the park in. Much of this question is based upon taxes and lenders. Lenders will likely want you to take the property in your own name (if this is a new business). If you are obtaining seller financing, then I would title everything in the company name. Which entity you choose is up to you and your tax advisors but I would suggest you look into the benefits of an LLC for this type of property.

Best Wishes,

Tony

Re: Advice on buying a MHP…what next? - Posted by Anne_ND

Posted by Anne_ND on July 15, 2003 at 09:55:50:

Hi Jim,

I suggest getting the materials by Ray Alcorn and Earnest Tew that are sold at this site (very reasonably). In them you will find great detail on due diligence for MHPs and ways to negotiate with MHP sellers.

Good luck, owning a MHP is a dream of mine!

Anne

Re: Advice on buying a MHP…what next? - Posted by Jim Schad

Posted by Jim Schad on July 15, 2003 at 08:27:30:

Also, what is typical operating expenses? I have seen 25%, 38% and this one has 61% which is WAY high.

Re: Advice on buying a MHP…what next? - Posted by Eddie-MI

Posted by Eddie-MI on July 15, 2003 at 11:34:55:

Before I would waste any time doing doing due diligence, I would tie it up with a contract. I have seen a few sellers who play games and don’t really want to sell. Assuming the monthly income is 60 times or less the purchase price- I would tie it up and kick tires later. Don’t do any due diligence until you have a signed contract and have visited the place.

Yes, some mobile home parks can have very high expenses. Usually from high water bills. A small park I own has about 60% expenses also. Biggest thing is the water, but you can sub-meter very easily. If you put down 75,000, you probably should use a contract for deed and a 5 year balloon.

Closing costs for this kind of a deal should be next to zero. I made the seller pay for a survey and title insurance when I bought a small park. The only other thing is paperwork preparation and recording fee’s. The only closing costs I paid was a 21 dollar, contract for deed recording fee.

With a 30 year amortization at 7%, I would give him his price and a 5 year balloon. The 7% for 30 years is very good. But bang down the 75,000 downpayment to 40,000 or so. And have him pick up all closing costs. This way, You need 35,000 dollars to close. I would tell him you will cash him out at the end of 5 years and that 75,000 is 30% down is too much for this type of property. A 15% downpayment is something fair for everybody because of the improvements that need to be made, increasing occupancy, etc.

The bad thing about a realtor is they really hurt this kind of a deal because of commissions. However, they usually are incompetent at selling parks- so they may actually help you as a buyer. Don’t bring in another realtor though unless you are one yourself.

Biggest thing is the current income though. If the monthly income is more than 60 times the purchase price, I would pass on the deal. Especially with 61% expenses. Makes evaluating parks very quick and painless. Although there are a few deals where paying more than 60 times makes sense.

am I ?cixelsyd - Posted by Steve-WA

Posted by Steve-WA on July 15, 2003 at 13:58:53:

dyslexic?

you said:

If the monthly income is more than 60 times the purchase price

shouldn’t that be the other way - key on a purchase price that is less than 60x monthly income? I.e., monthly = 1500, so purchase price should not exceed 60 x 1500 = $90K

??

Re: am I ?cixelsyd - Posted by Jim Schad

Posted by Jim Schad on July 15, 2003 at 14:23:08:

I got confused too. I would LOVE to buy a place that had a monthly income 60 x the price. Pay 1000 and earn 60000 the first month!!!

Re: am I ?cixelsyd - Posted by Eddie-MI

Posted by Eddie-MI on July 15, 2003 at 14:59:28:

Ok if the current monthly income is 5000. I wouldn’t pay more than 300,000 for that park (60 times monthly income). Maybe i got a sentence mixed up, but I think most folks know what I meant.

Re: am I ?cixelsyd - Posted by Pete

Posted by Pete on July 16, 2003 at 17:48:48:

In your example is the 5000 monthly income gross revenues, net revenues or net income?

Thanks.