Yes… don’t. - Posted by ray@lcorn
Posted by ray@lcorn on March 06, 2001 at 19:04:33:
Glad to hear you’re out shaking the bushes. As you know, there are lots of properties for sale, but true deals are hard to find. I’m afraid that is the case here. This deal is a potential turnaround candidate, but the asking price is so high as to make it a waste of time to even determine the potential.
As chill pointed out below, the deal as presented has negative cash flow if an 80% 20 yr loan is factored into the mix, but that is almost irrelevant, because the price is ridiculous. On a deal like this I would start with a 15% cap rate, just tell if there was potential for turnaround. On the numbers you gave, that means the sales price would have to start around $86,560, BEFORE deductions for deferred maintenance.
In most cases I would do some due diligence before approaching the seller for price reductions. But this one is so far out of line that any time spent is a waste unless the guy is willing to get real.
By the way, you have to start with true operating numbers. No property ever grosses exactly 100% of potential revenue. I may make more, it is usually less, but there will be a deviation. Delinquencies, collection expense, vacancy, etc. can and do happen on a regular basis. It looks as though he has given you the actual expenses (by the way, they are way high, and I would want a breakdown of what is in the $6T “other” category IF I were going to work the deal, which I would not right now. Could be found money, as in owner’s salary, etc.)
You need to know just how real this seller is. Ask him what he would take all cash, IF you could pay it. I would be floored if he came down as far as it would take for me to do the deal. What’s his motivation for selling?
If he says he was just joking, or the price is a typo, (I’ve seen it happen) and cuts the price 55-60%, then you might have something to work with. If so, then it is absolutely essential that your first step is to talk to the local planning department. You will not know the true facts about this property until you do. There are different degrees of grandfathering in zoning. In the worst case, the park could be grandfathered, but only for the present occupants. As homes are moved out, the ordinance could prohibit their replacement. Best case would be if the park could be brought into compliance with the zoning ordinance. That way you have a stronger sale when you’re ready to exit the property. But first you have to know what you’re dealing with. Also ask questions about the park’s history… someone in the department may know a lot that you need to know. I’d do this before making another move.
Sorry to shoot holes, but this is a non-starter. Say hi to Betsy for me!