Mobile Park - Posted by Tom (PA)

Posted by Ernest Tew on December 19, 2000 at 07:30:22:

Even with an increase in lot rent to $260 per month, you could never justify a price of $30,400 per space as a park.

As commercial land, the property might be worth the price. But, from the information provided, there is no way to know.

You might consider whether you have a need for the land? Whether you could pay such a high price and still make a profit? If the return would be sufficient if you paid cash? Or, whether you could make the payments if you were to buy on terms?

Unless you are highly experienced in such properties, my recommendation is that you pass on this one.

Mobile Park - Posted by Tom (PA)

Posted by Tom (PA) on December 18, 2000 at 20:43:55:

Your opinion, please, of this deal that involves a 37 lot park. Total expenses for 2000 was $24,225. Present income for the park is $91,905, but plans to increase lot rents to $260/month in 2001, and some units pay extra for water for washing machines, so anticipated 2001 income is expected to be $119,040. Seller will take 15% down, and will arrange financing so that monthly seller financing will be 8% and total no more than $5000/month, with a 3 yr balloon. After 3 yrs, if I cannot get re-financed to cash him out, he will then take a 10-15 yr mortgage with the then-prevailing bank commercial interest rate. The problem??? He is asking $1,125,000! Which is asking $30,405 per lot. I had read that paying $4,000-$7,000/lot is a “good” price for an old park, and to build a brand-new park would cost about $15,000/lot…but he is claiming that this is prime commercial property, along a prime thoroughfare, which is about to burst with shopping malls, housing developments, etc, (and I agree). So, his price is based on “the future”. I can net $3000/month as it stands, but this asking price seems way out of line. Geez, what the heck do you do? Plan for “the future” development? Houses in the park are about 15 yrs old average, and there is room for 4 new houses. I could sell those new houses and hold the notes.

My hunch is that it is probably great commercial property to own, and it is structured to net me a decent montly income, but that it is way overpriced?

How would you approach this?

We can chat on the phone if you wish.

Thanks

Re: Mobile Park - Posted by ray@lcorn

Posted by ray@lcorn on December 21, 2000 at 09:48:47:

Tom,

I can’t follow your math here. Using the actual operating numbers, the park will not cash flow even with interest only financing.

$91,905 gross
-$24,225 expense
$67,680 NOI
-$76,500 interest only on $956,250 @ 8%
-$ 8,820 cash flow

To make the debt service no more than $5T per month, the rate would either have to be 6.27%, or the principal reduced to $750T. Even assuming the $60T annual debt service, the net is only $7,680 per year.

I don’t buy property based on projected numbers, and it seems the expenses may be understated. Most parks will run around 35% expense unless utilities are separately metered. But even taking the existing expense amount (very wrong to do so), the thing still doesn’t net $3T per month.

$119,040 gross
-$24,225 expense
$94,815 NOI
-$76,500 Interest
=$18,315 cash flow, or $1,526 per month

Assuming $168,750 down (15%), and the terms you stated, the cash on cash return would be non-existent on the actual operating numbers, and less than 11% on the questionable projection. Plug in the numbers for a typical loan at 10.5%, 20 years, on the questionable projection and the debt service is $114,564, putting the project back in a negative cash flow. These are the terms you will dealing with on a refi, so the only exit would be to remain the captive of the seller. The likely outcome would be that you would in effect be managing this park for the real owner.

I would not go into such a deal hoping to take my profit on the appreciated residual value of the land. Closing and redeveloping a park is something I have done several times, and the costs are considerable. If the current land values in the area support the asking price on a raw land basis, then the best bet would be to close the park immediately rather than subsidize the operation for any amount of time. In sum, I don’t think there is a deal here under either scenario.

ray