Posted by Tony-VA/NC on October 23, 2003 at 09:43:53:
Once again, I respectfully disagree with both your figures and advice.
Your are attempting to apply an absolute value to something that is influenced by locale and personal preference.
How do you know that a 10% cap rate on land alone is a great value? Maybe it is to you, maybe it is not to me.
How many parks have you purchased using your Moral of the story, “CAP rate (and thus, your MHP purchase price) should be figured on LAND VALUE ONLY?”
Are you writing this based upon personal experience Phil?
Paying $24k per lot (especially when you are not counting the home) in a mobile home park is incredibly high for a wholesale investor (and we don’t invest in retail).
I find it curious that you would suggest someone pay that high per lot in a park, yet tell them that a mobile home is worth so little. You wrote that “you won’t get them that cheap”…well Phil, you darn well better get them that cheap if you are shelling out $24,000 per lot.
Stating absolutes is poor advice Phil. For example you wrote, “It is OK to pay $24,000 for a plot of Real Property (the land) that produces an adjustable rent payment of $300 per month.”
I have to ask, have you bought a park and did you pay that much?
Purchase price and terms are determined by negotiation, not fancy math. Yes, your max price can be determined by math but I suggest it need not be through the CAP rate or through the elimination of assets (such as the mobile homes).
I admit that the homes are more work and that effort needs to be accounted for. It does not, however, need to be eliminated or reduced too far. Be reasonable with replacement value and income vs. effort evaluation.
In a large park the rental homes would be of less value to me but they would still have value. Although one could argue that the personal effort required in such a park would likely be offset by onsite managment.
Are we over paying if we give the park owned homes value? Not necessarily. Sure if we CAP rate the homes income we may come to a misleading number (so why use a cap rate).
There will never come a time when we will sit down with a seller and show them our fancy math, tell them their park is not worth a penny more and offer that amount.
What happens in reality? We decide what the park is worth to us based upon effort and investment. Income less expenses. Chances are we will negotiate various debt service scenarios and come up with a purchase price for each.
Lastly, we may wish to compute a CAP rate (using the bankers formula) to get a ball park on purchase price so as to determine how various lenders may come into play should we go that route or sell in the near future.
Thus the CAP rate becomes like a “check the math” type function. It means little to me but it may be important to banks. Banks however do not have parks appraised based solely upon the CAP rate. They use several methods to arrive at a figure and loan based upon that figure.
I am also suggesting that if you use a tangible, dollar in, dollar out type evaluation plans, your purchase price will be more accurate to you. CAP rates are flexible and for many new investors who may miss an expense, the CAP rate can compound the problem horribly.
The reality of the deal is this. Does my dollar for dollar evaluation and negotiation plans reach a purchase price (or terms) that is in line with what the seller is willing to sell for? Chances are I will be quite a bit lower than the seller’s asking price but is my MAX price reasonable?
If yes, then I offer even less and negiotiate to no more than that max price. More money is made via negotiation and my Max price and terms prevent us from going too far.