Does this look like a viable land/bank deal? - Posted by Ken L (MI)

Re: Does this look like a viable land/bank deal? - Posted by SteveD(TX)

Posted by SteveD(TX) on March 18, 2006 at 11:06:42:

But his net after paying for the mortgage payment and expenses is essentially $0 per month for the first 5 years. Still sound good? What is that MH gonna be worth after 5 years of renters? The best way to do this deal is either all cash, or put enough into the deal to just mortgage the lot, then do a Lonnie deal on the MH. Otherwise, it’s way too “skinny” for me.

Re: Does this look like a viable land/bank deal? - Posted by Tim

Posted by Tim on March 18, 2006 at 11:04:53:

No offense intended here, but how exactly did you come up with your road, clearing and leveling & building gravel drive/roadway costs. Your total budget for these items is $10,500. In my area it costs about $800-1000 to get a residential lot prepped for building. I know you can get a discount for quantity, but are you sure you can get 20 lots cleared & leveled for less than $100 each? Then you have $6500 budgeted for the road. Unless you are buying a lot of frontage you are probably talking about 1000 linear feet of road. Can you actually clear, grade & gravel that much road for $6.50/ linear foot? It would cost a lot more than that in my area. Unless costs are a lot different in your area I think you are being overly optimistic in your estimate. I also don’t see any budget item for permits, at $100/home that’s another $2000.

I am not trying to rain on your parade, & sincerely hope your project is successful. I just don’t think I could use those numbers in my area.

Re: Does this look like a viable land/bank deal? - Posted by Tony Colella

Posted by Tony Colella on March 18, 2006 at 10:19:59:

It it usually possible to get a lower per unit price by buying or developing in bulk. Real estate is no different.

Your per unit price is a bit higher but so is the cash flow.

Yet you had to spend a good deal of time, money and effort to capture it. Meanwhile our $13k buyer writes the check, closes in a few weeks and starts to collect rent.

Developing is a great way to capture a wholesale cost but it is a slow process from buying to actually collecting cash. Nothing wrong with this by any means. And not everyone can or wants to try these larger deals, but many can do the $13k deal.

Your 20 lots looks like a good deal for you. I do feel your pain though when they try wrapping the red tape around your kneck. The red tape is the least fun part of developing and I don’t believe anyone is immune to the frustration. I am sure you will hang in there and make it through it, knowing there is a pot of gold at the end.

Tony

Re: Does this look like a viable land/bank deal? - Posted by SteveD(TX)

Posted by SteveD(TX) on March 17, 2006 at 14:40:40:

Sorry, the above NOI reflects 10% vacancy loss; at 5% it would be $2232 or 186 per mo., for a loss of $30/mo.

Re: Does this look like a viable land/bank deal? - Posted by SteveD(TX)

Posted by SteveD(TX) on March 18, 2006 at 11:16:11:

This is in a county with almost no restrictions whatsoever as to codes, etc. The land is sugar sand - no mud, so need for gravel is minimal to non-existent, but there will be some, even though most mobiles in the area have just bare dirt for driveways. The cost of bulldozing and clearing has been provided by my equipment guy I have used before. A SWMH doesn’t need a built-up pad if the land is fairly level and it is. Mainly, we’re just clearing trees and brush. I am probably high on some of my numbers, based upon the estimates by the MH mover, septic and well people, and equipment operator. I’ve built in a cost overrun allowance of 5-10% over actual numbers I’ve already been provided.

Re: Does this look like a viable land/bank deal? - Posted by SteveD(TX)

Posted by SteveD(TX) on March 18, 2006 at 11:36:42:

BUT, we were asked to comment on his specific plan, which is a loan for 80% of the price. Based upon the specific scenario he laid out, the deal doesn’t make sense to me. Essentially an equity dividend of 0% after expenses, and what kind of condition is tha MH gonna be in after 5 years of renting it out? I think a cash deal makes much more sense, or at least put enough into it to get the MH free and clear so you can do a Lonnie deal on it and collect lot rent over the long term.

Money On The Table - Posted by Tony Colella

Posted by Tony Colella on March 18, 2006 at 10:11:18:

This is a prime example of where fancy math can get in the way of making money.

I have never been a fan of CAP rates but do use them when I talk to banks or buyers.

But even the proponents of CAP rates will tell you that you NEVER CAP rate a single unit property.

As I said, value is unique to each investor. What looks skinny to you looks fine to me. No right or wrong.

I would however approach the deal entirely different that what you are assuming. I am not sure why we would choose to finance for 5 years or pay 20% down. Your right, under those terms the deal may be skinny. I have never had to do either when buying single or double wide land/home deals. But even if I had to, I still see money on the table.

I focus my attention on cash flow (while seeking equity increase my net worth and allow me to tap the property for cash later to do other deals).

Scenario 1: I would pay all cash for the property so as to maximize cash flow. I could use my cash or if need be, or refi another Land/Bank property or simply borrow against the property by going to banks we have established relationships with (stressed here time and time again), finance the purchase through them for 20 or 30 years at a reasonable interest rate.

Or buy however necessary while setting up the long term refi after 12 months to get all my cash out of the deal and still cash flow nicely due to the low interest rate and longer amortization.

Even if we stick with your 5 year or less type amortization we would make money by understanding that this property will not due much for us the next few years cash flow wise (but perhaps we work extra hard to pay off that financing early) but that the property will mazimize cash flow once the loan is paid off in a couple of years. A slight delay in gratification but not a bad alternative, just not my preferred method at this stage.

My point is there are many ways to make this type of deal a nice addition to the portfolio.

The exit strategies would be many which lowers our risk and have the potential to increase profits even further (sell off the home and rent the dirt to reduce maintenance; or sell the whole property off by owner financing the sale at good terms and higher price etc.).

Again, no one is right or wrong but I see money on the table and would endeavor to make it mine with a deal like this.

Tony

Re: Does this look like a viable land/bank deal? - Posted by Tim

Posted by Tim on March 19, 2006 at 10:11:08:

It sounds like you have done your homework. Hope everything works out as planned.

Re: Money On The Table - Posted by SteveD(TX)

Posted by SteveD(TX) on March 18, 2006 at 17:22:40:

"I have never been a fan of CAP rates but do use them when I talk to banks or buyers.

But even the proponents of CAP rates will tell you that you NEVER CAP rate a single unit property.

As I said, value is unique to each investor. What looks skinny to you looks fine to me. No right or wrong."

Like you said, this deal only looks skinny when you look at his scenario of financing 80% of the deal. And that’s exactly what my comment pertained to. After payment of expenses, likely there is no cash flow at all for the first five years.

And I estimated the cap rate just to show that on the surface, it looks like a decent investment. A cap rate is the relationship between one year’s income and value or price. Nothing more. I would argue that application of a cap rate is ALWAYS proper when looking at income producing properties, when reliable sales data and resulting reliable cap rates are available to the investor. This is also a requirement for an appraiser 1 unit or a thousand. But using them can be deceptive if you don’t understand them. Going in cap rates, are different from stabilized cap rates, and terminal cap rates. More sophisticated investors will only look at the internal rate of return, or yield rate. In this case using his specific scenario, a decent yield is still questionable. All cash, that’s different.

Re: Does this look like a viable land/bank deal? - Posted by SteveD(TX)

Posted by SteveD(TX) on March 19, 2006 at 13:30:24:

Thanks. I’ve done a few regular single family subdivisions in LLC’s and partnerships in the past, but this and the one on the land I already own will be my first MH developments. This particular deal probably won’t happen until next year, but I should have the land tied up in the next two weeks if everything looks good. We’re looking at bringing in a MH dealer as a third partner who has expressed interest since neither of us has a license. My only two Lonnie deals happened just before Texas passed it’s screwy licensing requirements.