Buying a Park - Posted by RJ

Posted by Tony-VA/NC on October 06, 2003 at 14:50:34:

Time and time again, I find that investors look to NOI as their profit. There in lies the problem. We are human. Inevitably something comes up and because there is money in the company check book, we end up spending it. It is quite easy to justify most of these costs. But unless we take our profit and set it aside first, we can end up with nothing.

It’s like “paying yourself first” that they preach about in personal finance materials. You don’t have to actually pay yourself as an expense (let your CPA figure out the best way to get the money out).

What I suggest is that you view your time and effort as if they were operating expenses. Account for them (as if paid) like any other expense. What is left in the NOI, is the gravy. On tough months, many investors will not find anything left over for them in NOI if they do not set aside their profit first.

Tony

Buying a Park - Posted by RJ

Posted by RJ on October 02, 2003 at 18:19:10:

I am looking at a park and seriously considering making an offer. It has 25 spaces, all full. Twenty three of the twenty five have trailers 30-40 years old that will be included in the purchase. Rents run 300 to 650 depending on the trailer size. Full month brings in 10500.00 bad month 7500.00. Cost is 575000.00.

Any advice?

Re: Buying a Park - Posted by Bert NH

Posted by Bert NH on October 03, 2003 at 22:54:27:

Check out this thread. Ray Alcorn’s advice really opened my eyes. Let me know what you think!

Bert

http://www.creonline.com/commercial-real-estate/wwwboard5/messages/9553.html

Re: Buying a Park - Posted by Joe C. (AR)

Posted by Joe C. (AR) on October 02, 2003 at 23:58:27:

Try this link, and follow this advice:

Joe C. AR)

Re: Buying a Park - Posted by Kurtis

Posted by Kurtis on October 02, 2003 at 18:52:34:

Sounds like they’re asking a premium for the park. With all MH that old they’ll be some serious renovation costs in the future unless they’ve been maticulously maint. How old is the water and sewer lines? etc

Including Rental Income In MHP valuation. - Posted by Tony-VA/NC

Posted by Tony-VA/NC on October 04, 2003 at 12:05:50:

This is a repost of one I made to Ray Alcorn on the commercial forum to explain why and how I take into account mobile home rental income.


Ray,

Although to many on the MH board, it appears that you and I value the small parks differently, I suggest that this is not as true as some may believe.

Yes, I do account for rental mobile homes in the small park. I differentiate “small-mom and pop parks” from the larger parks. I do not know that I would be as interested in a 50+ unit park with a larger number of rental mobile homes but under the right scenario and financing, it might be considered. But I digress.

Most investors who have completed a “Lonnie deal” in a mobile home park will, at some time, find themselves dreaming of owning a park. The reality for most will be the opportunity to aquire the “small-mom and pop” type park that typically has less than 20 units.

These parks can be cash cows but will often consist of all park owned rental homes. This is where I differ. Your Deal makers quote states,“In short, there is no scenario in which a rental mobile home is an asset to a mobile home park.” I respectfully disagree with this Ray.

An Asset that puts money into your pocket, be it via rent or sale is an Asset. An Asset that does not require you to go out and spend $10,000 to move a similar home into that otherwise vacant spot, is still an asset. You can rent it to create income or you can sell it but it is still putting money into your pocket. That to me is an Asset. It has a value.

Where people on the mobile home forum seem to believe that you and I vary on valuation is this. I take a more simplistic analysis of the park in my area. Your method allows you to value parks nationwide, in areas that you have never seen. The parks you are intending to evaluate are typically larger than the mom and pop parks and often better documented.

The key for me is knowing my market. Knowing what individual mobile home(on a per spot drive by/walk through evaluation) will rent for.

Like you I delve into due diligence and find the true expenses, typically from the utility companies themselves, contractors (lawn care etc.). I determine the Net Operating Income but I Do include the rent from the mobile homes. This sounds like we differ but bear with me.

As a part of the Expenses, I place a value of my time and efforts to operate these rental mobile homes. This “cost” to the park Is Higher than if this were a lot occupied by a owner/occ mobile home. We don’t differ here at all. This expense comes out Before the Net Operating Income is determined. The Net Operating income then becomes an indication of what amount of debt service the park can comfortably support.

That debt service, under more favorable financing terms may support a bit higher purchase price (within reason) or it may support a lower price if the financing terms are more restrictive.

All that is really differnt is that you are placing one CAP rate valuation on the rent of the dirt and another CAP rate valuation on the rental homes (or simply assigning a value to a home that should take into account that a home already set up is worth more than a slightly nicer home that must be moved etc.).

My numbers simply become a matter of subtraction. I find that CAP rates for most new investors trying to buy there first small park may be dangerous. If they have overstated an income stream, understated or overlooked an expense, the CAP rate will magnify the problem.

In a nut shell you devalue the rental mobile home income stream because of the efforts. I take this same effort into consideration by increasing the amount of money (as an expense) that I need for the effort.

Finally. The price I determine becomes the MAX price I will pay for this property. Like you, I negotiate from Lower to Higher (as oppossed to reducing your first offer based upon due diligence discoveries).

With the small park I purchased, with the ones I evaluated without purchasing, and the ones I am currently pursuing, I never find an Absolute value for a property and I don’t think you do either. Value is what we can negotiate. It is in the eye of each investor. What reward I may be willing to work for, you may not be willing to work for. We come from different places in life. But for the new investors at the Mobile Home Forum, I believe the smaller parks are possible and easy to evaluate. Higher math is not required but certainly CAP rates are a common method of valuation. Banks like them quite a bit and chances are, when you use my subtraction approach, your CAP rate is quite high or at the very least, the same you would have sought via your method. In either case, the Net Operating Income is the basis for evaluation.

Tony

Thank you - Posted by RJ

Posted by RJ on October 03, 2003 at 10:56:31:

This is the best and most objective advice I have recieved. I’m including the banker in that too!

Thanks Again
Bobbie

Re: Buying a Park - Posted by RJ

Posted by RJ on October 02, 2003 at 19:23:08:

They have spent 45,000 last year in past due renovations. By their current budget they have 24000 a year in maintenance. It has a private well and septic. Water testing is about $150/month. Septic needs pumped every 9-12 months. The sisten for the water looks in good repair, and if forced I would say that it is twenty years old.

What do you mean by serioius renovation? Most have new windows and newer appliances. Most have storage sheds. I did not see any replaced furnaces on the work done, or any water heaters. That has me concerned.

So with mortgage at about 5000, maint. at 2000, garbage at 150, water 150, insurance about 175, legal about 175, taxes 150, that makes monthly expenses 7800.

Re: Including Rental Income In MHP valuation. - Posted by ray@lcorn

Posted by ray@lcorn on October 06, 2003 at 21:08:59:

Tony,

Calling me out, huh! Okay pardner, let?s get to it! (smile)

I think we’re on two paths up the same mountain here. You’ve heard me state many times that different investors can arrive at widely differing valuations for the same property, and all of their answers are right. No argument there.

And before I go any further, let me concede one point. I’ve noted in several posts on the MH board that you (by name if I recall) and others have done very well with MH rentals in small parks with hands-on management. But there is a difference between writing a book for general application and using a specific owner and a specific park as a general rule.

I know you well enough to bet that any MH tenant that does not toe the line in your park will soon find himself living out of the truck he rode in on. I’ll bet your rental home tenants are required to keep their lot clean, the grass mowed and the trash out of site. No cars as yard art, no deck rail clotheslines or spare tire planters (unless they?re whitewashed? (smile)). I would also imagine you don’t spend much time in court with delinquent tenants. If they’re late, I’ll bet you’re on their doorstep the next morning. Unfortunately, that is not the typical case. However, true is true and fair is fair. There are those owners like you that take a personal interest in the property, and take the time and effort to maintain the asset even better than a land lease park.

So the point I will concede is that the line in my book should not read ?there is NO scenario in which a rental mobile home is an asset to a mobile home park?? Obviously there is such a scenario, rare as though it might be. Dangnabbit, I should know better than to talk in absolutes. You have my word that in the second edition I will change that line to say ?Unless you are going to run a park like a former police officer would, stay away from rental homes.? How?s that? :wink:

However you raise some points that I think need clarification. One of those is asset classification. I have no issue with a mobile home being classified an asset. Of course it is, but it is a different class of asset than real estate. My comments about rental homes in parks pertain to the park’s value as a real estate asset (absolutes aside), and whether a rental home (generally) adds to that value. I think we take different paths to the same conclusion.

By your own definition, you concede that the MH takes more work to maintain and rent than do spaces. I think you would also agree that a MH (without it’s own land) is an asset that depreciates in value. The reason it depreciates is that it has a relatively short life and is easily damaged with even normal use. (Why else would NADA print a book of MH values that decline with age and condition?) Land on the other hand, appreciates in value. With some basic assumptions about maintaining the infrastructure, the land will appreciate along with the income it produces. We both realize and account for the fact that a MH carries more risk, effort and operating costs than the dirt, right?

If I understand correctly, you’re estimating the extra expense of maintenance and management (including a charge for your time), vacancy and collection loss, personal property taxes, utility costs and refurb costs at tenant turnover time against the total income of the park, then using a real estate cap rate for valuation? My way suggests a flat dollar value (read cheap) on the MH, and counting only the lot rent portion of the rental income to the park. (By the way… I didn’t make that up. The Appraisal Institute uses the same formula.)

The reason I do that is because I don’t think it is accurate to value the income from a short-life, depreciating asset at the same rate as an asset that appreciates with a very long life. You take the position that if the MH produces more income where it is (in the park) then the income stream is what is important, and the lifespan doesn’t matter since you’re taking good care of the asset. So isn’t the only thing we really disagree(?) about is the quality (life) of the asset that produces the income? In valuing the income stream, I discount the income attributed to the short-life asset, and assign it only salvage value in addition to the value of the real estate. You decrease the income from both the short-life and the long-life asset, but use the same rate to value both.

Both methods discount the cash flow, but your way will tend to underestimate the real total expenses of the rental MH in the future, (because you are ignoring the life and disposition cost) and hence bring a higher valuation. My way will likely underestimate the current net income the rental home is producing in recognition of the disposition cost, and yield a lower valuation because I assign more weight to the long term asset.

On a small park the difference would likely be negligible, or even a wash. But the bigger the park, the wider the margin of difference between those methodologies. That’s where it is dangerous to mix the asset classes. In a park no bigger than 50 units, significant income produced from rental homes can skew a valuation in the hundreds of thousands of dollars. That?s a big boo-boo about the intrinsic value of the real estate, and what I was warning against. Here’s why…

In your specific instance of a small park and a very hands-on owner, yes, a rental home can benefit your cash flow. But in order to translate that increased cash flow to higher resale value, when you get ready to sell you will likely have to find a buyer that has the same inclination and philosophy. That reduces your number of interested buyers at sale time, so the price is less likely to be realized. All market factors being equal, the land lease park will sell quicker and at a lower cap rate than one with rental homes. That’s the basis for my take on rental homes in general.

That’s not to say a market does not exist for the small park with rentals, but the value depends more on the sophistication and inclination of the buyer, doesn’t it? And if the buyer doesn?t realize what he is in for with increased maintenance and management, then they will likely not realize the same performance as you did, will they?

I wrote ?DealMaker?s Guide? to help buyers value and acquire small parks, and I still see the distinction is an important one. You took what I taught and adapted it to your own talents, pocketbook and circumstances. I applaud you for that, because that is exactly what you should do with any knowledge offered. But it’s dangerous to make broad generalizations from a sample size of one. For a typical investor buying a typical park, I would still give the same general advice about rental homes. Your own description of managing rental homes recognizes the changes in the equations of operation, valuation and disposition. Those changes have a cost, like it or not.

Now that said, let me turn both of us inside out. I?ve also said I hoped the day didn?t come I had a buyer that had read my book. If I’m selling a park with rental homes, I don’t discount the numbers the way either you or I are talking about. Last fall we sold a small park at an 8% cap on projected income, with a projected rent increase and five rental homes included in the income. No discounts, no split expense statement. And before you ask, no, I didn’t give the buyer a copy of my book!

Hope all is going well,

ray

p.s. Thanks for getting my attention. I haven?t been over here in a while and have missed y?all.

Re: Including Rental Income In MHP valuation. - Posted by Ryan_MO

Posted by Ryan_MO on October 06, 2003 at 10:53:16:

Hey Tony, i have a question in regards to a portion of something you wrote in this previous article. The passage I am talking about is this;

“As a part of the Expenses, I place a value of my time and efforts to operate these rental mobile homes. This “cost” to the park Is Higher than if this were a lot occupied by a owner/occ mobile home. We don’t differ here at all. This expense comes out Before the Net Operating Income is determined. The Net Operating income then becomes an indication of what amount of debt service the park can comfortably support.”

Are you talking about paying yourself something extra besides your final NOI, based on the extra work it takes to maintain the park owned trailers, and expensing that? If so, your NOI would appear lower though still essentially the same in your pocket, just allowing for less tax exposure based on the lower EBT, correct?

That passage just got me thinking, cus you know I’m not a big fan of taxes. Im such a good American.

Ryan_MO

Re: Including Rental Income In MHP valuation. - Posted by Tony-VA/NC

Posted by Tony-VA/NC on October 07, 2003 at 17:40:44:

Ray,

Thanks for posting a reponse to this line of posts. It is a topic that I have hoped would be explored and I am certain that you understand I would not “call you out” on any such debate. What I desired was what we received, a discussion.

Your words ring quite true. It is like climbing to the same summit but on different sides. The view and perspective is different but the objective is not. As such, I do not believe that you and I differ much on this topic, we just view things from a different perspective. A few interesting variations are what I hope to discuss.

For example, quite often we read the repeated phrase of “don’t count rental income from the mobile homes.” This is inaccurate, even in your valuation. You may assign a disounted CAP rate valuation, or stated value to the home. But in either case, both realty and personalty are assigned a value.

I would, however, beg to differ on the use of salvage value (at least as I read your post) simply because salvage value or even the often repeated “Lonnie value” to rental mobile homes in your park. The reality is that it would cost (in my area) between $10,000 and $12,000 to remove the old home, buy and move in another “Lonnie deal” mobile home, set it up, skirt, steps/landing, utility hookups and the usual reasonable paint and clean up or minor repairs.

I think if one is going to accurately value the older, rental mobile home that we meet somewhere in the middle.

Another perspective difference is the size of the park. My radar floats in the under 25 at this point. Yours is quite a bit higher. What would be a reasonable nuisance in my size park would be magnified into suicidal tendancies in parks of 50 to 100 lots.

Where my posting about park valuation began was with the type of park that the typical new park investor here might encounter. The smaller 20 and under unit, mom and pop park. Most that we find in my area contain nearly all park owned and rented homes. This precludes us from evaluating these parks without them. Being forced to assess the rental value, we now must decide upon a valuation system.

If we disount the value of the homes too sharply, we find ourselves stepping over profit and missing opportunity. Buyer and seller never meet in the middle and the deal is lost.

If we over value the rental homes, we find ourselves in a poor cash flow situation. Shame on buyer.

Many folks suggest that you buy the park and homes and then sell off the homes via Lonnie deal. This sounds perfectly reasonable. But the reality is that the lenders may not allow this to happen. I also find that since I will be owning the real estate for many years to come, that Lonnie home will end up in my possession once again. While I may enjoy the non-maintenance during the sale period, we know that Lonnie deals are not always improved, kept up and paid off. Thousands of dollars are likely to be spent each time we repossess and sell a Lonnie deal. Why so much? Because you are likely to want to lower the bar on a home you sell while expecting others to keep their homes up.

If the parks for sale have rental homes, we need to find a way to buy them that works for all. Honestly, once a truly motivated seller is found, the numbers work almost regardless of the type of valuation. Even an OK deal can be greatly improved upon by favorable owner carry back financing. That is where the deal gets fun.

It is my hope that those Lonnie dealers who have found themselves dreaming of park ownership, will find a small park and not pass it up for lack of understanding of CAP rate evaluation or by undervaluing the park to a point that the sale won’t work.

Ray, I think we both will agree that it all boils down to a motivated seller, a creative buyer and in many cases…really cool financing terms.

How do we get those three things in alignment?

One word.

NEGOTIATION.

Thanks Ray,

Tony