Re: need advice on park! - Posted by ray@lcorn
Posted by ray@lcorn on February 18, 2001 at 19:49:58:
Greg is right about the valuation of the homes. They must be valued separately from the ground. I usually figure the income with market space rent as a place to start. Then I deduct all expenses except the maintenance and insurance on the mobiles. That gives the Net Operating Income of the park itself, to which i can apply an appropriate cap rate (another discussion), and get an idea of value. Valuing the income stream of the mobiles is a little more difficult. I tend to ballpark a rough estimate of their retail value, and use half of that, just as you would buying a home for a Lonnie deal. Add that figure to the value of the park for a total value.
I should add that it is also usual that after using this method to value a park with rental homes, I usually don’t get the park bought. The exception is when the homes are fairly late model, at least 14 feet wide, and can be sold in place ala Lonnie deals without hurting the potential of the park. But in most situations, the homes are old, the tenants questionable, and it will cost money to move them both out. The owner of a park with a lot of rental homes needs a cash flow buyer that doesn’t mind owning rental mobile homes. I mind.
Here’s an excerpt from my book “DealMaker’s Guide to Mobile Home Parks” that discusses why…
As we discussed earlier, one of the differentiating factors of a mobile home park as an investment is the stability of its tenants due to the expense involved in moving a mobile home. Rental homes negate this advantage. Many park owners look at rental homes as being a boost to cash flow, and on the surface that would appear to be true. The homes can often be bought cheaply, or in many cases, a park owner will accept title to a home in payment for past due rents. Collecting a deposit and rent double or triple the amount of space rent seems to be found money, with no harm done to either tenant or owner.
But this is not the case. The home is usually rented to a succession of tenants who have no investment in the community, and no pride of ownership in their homes. As a result, the maintenance on the home remains the responsibility of the owner, and is often neglected. Many rental tenants will not even tell a landlord of minor problems such as leaking toilets or stained carpets for fear of reprisal or loss of deposit. If not totally ignored, the maintenance is done sporadically, and costs run abnormally high due to the transient nature of the tenant base and the relatively low amount of damage that can be sustained by a mobile home without incurring substantial expense to correct. Often the yard and space around the home is ill kept as well. I have seen parks where it was hard to tell which cars ran and which were yard art due to the proliferation of junk around rental homes.
The effect on the community as a whole is just as pronounced. Rather than fostering an atmosphere of neighborhood and shared responsibility for upkeep with the residents, the rental home tenants tend to come and go without developing friendships or ties to the community. Residents who own their homes will resent the transients, and have the impression (rightly so) that the owner of the park doesn’t care about the quality of life for the residents. They will cease to be community minded, and may even start making arrangements to leave. Prospective new home owners exploring parks for location of a newly purchased home will most likely not choose to locate in a community that looks and feels unkempt. The park owner will then begin to meet resistance for increases in space rent. I have very often found that parks with a high percentage of rental homes lag the market in space rent by as much as 25%. The reason is simple. None but the lowest quality tenants will choose to live in substandard conditions if better are available at a comparable price.
Finally, because of the depreciating nature of a rental mobile home, the cash flow from that home must be valued differently than that of the income from space rentals. Allowance must be made for increased maintenance costs, collection losses, and higher vacancies in both spaces and homes. Since the home itself will rarely outlast the spaces, it must be capitalized at a different rate. I will generally not count the rental income from a home in the gross income for the park. I value the homes separately, based on age, condition and size. In the case of badly worn or aged homes, I will actually deduct the cost of moving them out of the park from the final value of the park. In short, there is no scenario in which a rental mobile home is an asset to a mobile home park.
Also be aware that the potential exists for a park to have a rental home problem without the park owning the rental homes. Many times I have seen dozens of homes owned by other investors as rental housing, but shown on the rent roll as a space rental only. The effect on the park is the same regardless of who owns the home. I don’t begrudge investors that make it their business to rent mobile homes. I just don’t allow it in my park. When examining the rent roll, you should be on the lookout for the listing of the same name on multiple spaces. Or the tip-off may be a corporate tenant, such as XYZ, Inc. may be listed as the tenant of space #101. That same corporate name may be listed on the rent roll for multiple lots. If so, then you have probably found the owner of a rental home. Question any tenant listing that does not appear to be normal. Ask the question outright of the owner, “How many of the homes in this park do not belong to the occupant?” Again, the only way to totally insure that you have the facts regarding ownership is to require tenant estoppel letters as a condition to closing.
Hope this helps,