Posted by Trailermonkey on April 24, 2006 at 21:05:30:
Ray,
Thank you for taking the time to share with me your experiences. I will take your advice to heart, and not go thru the experience of learning on my own! This is a great forum, and an extremely useful tool for fellow investors. Once again, Thanks!
Need help with determining value of MH park - Posted by Trailermonkey
Posted by Trailermonkey on April 22, 2006 at 14:07:36:
I have found a MH park owner who is willing to sell, but I feel the price is too high. The park is located in a small Texas town, but there is growth all around. It is not located on what I would consider commercial property, it has no major highway frontage. The park has 16 spaces, of which all are rented. Their are 7 park owned homes. All homes in the park are real dogs. The park has no ammenities, and consists of just one gravel road that cul-de-sacs with homes around the perimeter. With a little rehab, the place could be nice. It appears to have just been neglected. My intension would be to remove all homes from the park, and replace with very nice 2000 model 16x76 singlewides. I would offer current residents the option to lease/purchase these units, or owner financing.The current rent per lot is $200per space, and I feel it could bring $250-300 per space by giving the park a facelift, and offering easy financing. I keep hearing about cap rates etc., but where would you guys value this park, and what would you offer? I truly appreciate your guidance in this area. I have been in the retail end of the MH business for 25 years, but this is the 1st park I have looked at buying. The two things I do know is that I will be able to fill all of these homes/ lots relatively quickly (6months). I feel feel for certain that I should be able to get about $550.00 per lot and home. What do you guys think? Thanks.
Re: Need help with determining value of MH park - Posted by ray@lcorn
Posted by ray@lcorn on April 24, 2006 at 13:10:31:
This type of deal would typically be valued on replacement cost basis rather than the income approach.
That’s going to be figured something like this:
land cost + cost of improvements - depreciated value of improvements - deferred maintenance = present value
Just as an aside, I grew up in the retail side of the mobile home business. At one time my dad was one of the largest MH dealers in the south. We (me and my brothers) got into developing parks to have a place to park the homes we sold. One thing we learned (over and over again) is that there is a big difference between buyers and renters.
I strongly disagree with using lease/purchase or rent-to-own agreements with mobile homes as a way to fill parks. It’s been my experience that a tenant/buyer has much more experience as the former and will rarely become the latter.
The rental mobile home tenant is generally the bottom of the barrel credit-wise, and as a result is almost always highly transient. That destroys the community mindset of land-lease parks.
The seemingly high cash flow from rental homes is in all but the rarest of cases, an illusion. High maintenance costs, high turnover, and increased collection problems make the property management-intensive and expensive to operate. A park with a large amount of rental homes inevitably has expenses in the 50%-60% range, vs. 30%-35% for land-lease parks.
The reason investors like MHPs is because of stable rent rolls, low maintenance/management requirements and hence a solid, predictable income stream. Rental homes take all of the advantages away, and hence decrease the value of the property. That severely impacts any exit strategy that involves selling at a high profit. Case in point: consider how the park you’re looking at got that way.
Now all that said, anytime I express these thoughts I often get asked about selling homes in your own parks on a seller carried note (aka Lonnie deals), and whether that creates the same problems as rental homes. For the most part, the philosophy that Lonnie Scruggs has developed and uses with such great success avoids these problems. But you have to do it his way. That means you truly sell the home, transfer title, and become a lienholder, not a landlord. No rent-to-own or lease/purchase deals, especially in your advertising. Don’t cut corners because it saves a few bucks in sales tax or title fees.
Three reasons it is important to heed this advice: First, if you don’t truly make the resident an Owner, they will act like a renter every time, and that kills your park. Second, when it comes time to sell or refinance the park it will be considered a land-lease park and get a higher valuation and better finance terms. Third, the notes create another saleable income stream separate from the real estate, hence increasing overall value rather than detracting from it.
Just my two cents,
ray
p.s. If you are going to do Lonnie deals in your own park, for several reasons (taxes, liability, etc.) it’s best to use a separate entity to hold the MH notes from park ownership.
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