Posted by Miles Garner on July 25, 2003 at 22:48:48:
This site offers a book by Roy Alcorn that would
probably be a good starting point.
There are several “rules of thumb” such as,
a business is worth 5 to 10 times what it nets
yearly. But the point of my previous note
was complexity of valuation. The condition
of the park, the neighborhood, the general economy
and several other factors must be considered.
It is much like the purchase of a used car… It is
ultimately worth what someone will pay for it.
Determining value of m/h park based on net? - Posted by Barry (GA)
Posted by Barry (GA) on July 23, 2003 at 12:50:19:
Ok,
I have read the messages about Ryan’s success story and some have disagreed with its worth while others think it is good based on cash flow. I am not looking to get arguments started but just trying to learn. Can you give me guidelines about this? I am just trying to learn at this point. I looked on the mobilehomepark store (dot) com site and saw some parks for sale in my state. Here are some examples-
…Sales Price of $650,000, Net of $30,000
…netted over $86k last year…asking $800k…
…Asking 700k will net between 60-70k
…park nets $18,000 per year…price was 85K, now motivated to sell at 70K
Based on these figures, are these good deals? Do you look at paying “X” amount times net for a starting point? Any and all replies appreciated.
Regardless of property type (e.g. MHP, Apt., Retail), what is being valued is the quality of a stream of income. Rules of thumb are great to make an initial decision of whether to pursue a particular deal. For me, my quickie judgment is cap rate… specifically whether the price is above or below a 10% cap rate. Why 10%? Because the math is easy. Above ten and I know the seller is somewhat motivated. Below ten may still warrant a closer look for unrealized upside potential. Below eight and I’m probably not going to look any further… now. (If it’s in an area I like I’ll save it and check back i a few months.)
But that’s just a rough first cut… a way to wade through the offers to sell. If you’re looking at a lot of deals you want to be able to home in on the ones with the most potential.
Once I start looking at a property I need more accurate information in order to establish my value. It will be worth different amounts to different investors.
Price is a function of certainty. The more certain the income stream, the higher the price, and hence lower the return. Certainty increases as the risk and effort of producing the income decreases. Investments that require presence are worth less on a relative return basis than one that doesn’t. Think about the relative effort and risk required to manage the investment in a T-Bill compared to an income property.
So the real job past the first cut becomes one of verifying every piece of the income stream… money in (income), and money out (expense). That’s known as due diligence. Until you’ve done at least some due diligence you don’t really know whether the income stream is fairly represented or not. For more on that see the article at http://www.creonline.com/articles/art-148.html
After you have a reasonably accurate Net Operating Income, the real fun starts… finding the price and the deal structure that can meet your investment goals and the needs of the seller. For more on that, see my article titled, “What’s it Worth?” in the articles section of the website. The direct URL is http://www.creonline.com/articles/art-216.html
Posted by Miles Garner on July 25, 2003 at 07:46:28:
There are factors other than roi which determine
the valuation of a business. The hassle factors,
labor or capitol intensive projects involve a subjective element. If you are looking for excellent roi I have a m/h park in the development stage in B’ham, Al. All elements are in place including zoning,
we need a partner for financial assistance. I have done cost and cash flow projections and would be happy to e-mail copies.
Posted by Barry (GA) on July 25, 2003 at 14:05:38:
Thanks for the reply. I was looking at a couple of small local ones and was just wondering what a good “starting point” is for determining the value of a park.