Feedback on MHP sale

My husband and I have been looking for a MHP for sale with the right elements and think we may have found one. We have yet to complete a full checklist of due diligence, but thought I would throw the numbers and info I do have out for consideration and feedback from the forum.
First of all, the park meets all of our ‘location’ requirements. Right outside a large MSA, population count of MSA, commuting access to several cities, correct financial demographic of the population, rentals in demand, on a bus line, w/in walking distance of Walmart, ect.

-50 total units, 6 of which are SFR or duplex so 44 actual mobiles. Only 4 mobiles are owned by the tenant, rest are park owned
-SGI is 29K/mo
-Expenses of well, septic, electric garbage total 12K annually
-Taxes and insurance 22K annually
-They manage and do most maintenance themselves, pay some part time help onsite, exact costs unknown yet.
-Practically 0% vacancies
So: 348,000 SGI-5% Vacancy 17,4000= 330,600 AGI
330,600- operating expenses 34,000 = 296,600 NOI
Asking price is 2,000,000 with 560,000 assumable @ 3.48 w/ 1% assumption - their current payment is $4500/mo
Seller is willing to carryback, (knowing they must because banks won’t loan on the park owned home income) the exact amount unknown and not negotiated yet.
Proposed financing option: Seller finance 1,440,000 @ 6% over 30 yrs= 8,633/mo + existing loan of 4500= 13,133 monthly debt service
296,600 NOI - 157,596 DS = 139,004 CFBT

296,600/2,000,000= 15 cap rate

Contingent upon a full and detailed due diligence, based on the info I provided, are there any specific items or concerns I should make sure to consider?

Rents have not been raised in the last 18 months, and I would likely charge back a blanket amount utility charge to cover the park out of pocket expenses to further increase income. Will also work to sell park owned homes on contracts to the tenants, reducing park maintenance costs, which were not included in the above figures.

I have so many questions. On the surface though, it sounds like a full time job that the seller is currently working and once he quits, you’ll be taking on. Or paying someone else to do it.

The expenses sound very low, maybe because the sellers were working for free? What is the age of most of the homes? If older, small homes, can the lots support a newer model home (ie 16x70) or doublewide models?

Cap rates are pointless in general, but even more so in this case. First, because there are so many park owned homes, the rental income from those units should not be considered when looking at the cap rate. Second, you have sellers working for free which is distorting your cap rate number. When the cap rate is used to determine value in this manner, it’s acting like a huge lever, pushing the value way higher than it should be.

Not knowing anything else about the deal, I would most certainly pass at the $2M price. Unless there is some underlying value in the SFH property that makes this a deal for you? Could you split those off and sell one-by-one at a later date, ie, are the sum of the pieces worth more than the whole thing?

And finally, why not take on this property using a lease/option (master lease)? The benefits to you are too numerous to count. You get cash flow now with minimal outlay, and can basically use the seller’s equity for free. You also get an additional exit strategy, which is to walk away at the end of the lease. You didn’t mention anything about the seller’s motivation level (which is a key issue in my mind) so depending on that you could reconstruct this deal so that it’s much more favorable for you.

Great points. I recognize that cap rates are a very subjective figure, but had not thought to calculate that based on lot rent only.

Yes, management would be an additional cost that we would incure as we do not desire to take on their full time job of self-managing. They have an on-site ‘assistant’ in place whose compensationis already reflected in the AGI.

I have been mulling around the thought of the lease option, and am liking it more and more.

We are currently looking at our investment opportunities focusing more on cash flow than equity. With that in mind, what formulations or mulitpliers would I use to determine a more realistic offering price?

Neecy, I would think your task in evaluating this property begins with separating each component being offered.

1.) the MHP lots…(there are some great courses available on this topic that really give you the nuts and bolts of structuring your offer. Ray Alcorn’s Dealmaker Guide to MHP investing is available on this site.) a.)Determine if each lot is functional, sized for 80’ long homes. B.) determine what market price is for MHP lot fee in the area- what the competition charges – and the amount of standard 3 br apartment rent divided by 3.

2.) a wholesale value of each of these park owned homes.

3.) value of the SFR’s…if they are smack in the middle of the MHP or if they front the street with the MHP behind them makes all the difference.

If using cap rates to compare other options is your aim – make sure that you only calculate on MHP pad rents, and SFR rents – don’t include the MH rental.

Buyers’ agent really needed here

There are experienced commercial RE Agents and Brokers nationwide who specialize in MHPs and I’d really recommend you shop for and hire one to represent you on such a purchase.

Even if you had to pay his/her fee it’d be a super-smart move for you.