Posted by Glenn OH on January 18, 2000 at 09:02:23:
Its value now is its income now. Don’t pay more for some future possibility that may never come. What if you got sick? Would you want an alligator, or would you want a property that can keep paying for itself while you recover?
Value of Park? - Posted by Ron Thompson
Posted by Ron Thompson on January 17, 2000 at 22:34:23:
How do you figure the value of a Mobile Home Park that has a high percentage of vacancies?
The park I am looking at has an elderly owner that has been in the hospital most of the past year. It has (I’m guessing) a vacancy rate of 80%. There is a similar, but larger park right next door that is probably 80% full.
I am tempted to fudge the numbers for an estimate.
I can buy this park for about $15k a space, plus it has a large commercial frontage on a 4 lane road (currently vacant fenced in land), parts and equipment, storage buildings, small coin laundry, etc.
I will also get very favorable owner financing.
I feel confident that in a year this park can be a real money maker.
Re: Value of Park? - Posted by ray@lcorn
Posted by ray@lcorn on January 18, 2000 at 10:42:02:
Ron,
Let me first apologize. I did not mean to sound so flip when I responded to your post last night. It was late, and to tell the truth I just didn’t have it in me to go into a detailed analysis of your deal. I posted the question with the thought that maybe you would think twice about “fudging” the numbers to make your deal. In my opinion, fudging the numbers hurts no one but you, and only benefits the seller. So why do it? Either the deal makes sense or it doesn’t. If it does, then find the terms that everyone can agree to. If not, then go on to the next deal.
Doug’s post is a good place to start in valuing the property. Personally, I might approach the deal as raw land, plus the cost of the improvements. In no case would I pay for potential income. I agree that the basic value of the land and improvements may have worth beyond the value of the present income. But don’t let that blind you to the fact that you will have to service that value until the income catches up. Therefore the down payment is only the first shortfall in funds you will experience in the deal. Plan for some negative cash flow in that first year. This deal may be a candidate for an equity sharing arrangement with the seller. Allow the seller to participate in the increased value (to a limited extent) in return for no payments in the first year, or until there is a positive cash flow. I have structured turnaround deals that essentially only paid the payment to the extent cash was available over and above expenses plus a management fee. You’re doing the seller a favor, so get paid for it. You need time to effect the turnaround. Time costs money, but it doesn’t have to be yours.
Also be sure you do your homework. Check out the zoning and development standards for your changes before you buy the property. It would be a shame to find out about a zoning violation only after you closed. If this park is in the 100 space range, I would consider selling the older park-owned homes offsite, and cutting a deal to put new homes in the park, and selling those with a more conventional finance structure. I say this because you may give up long term value appreciation for the park by going for the short term note money from the homes. If the park truly has the potential to be worth $15,000 per space, (that is a very high valuation) then you should aim for that with every decision you make.
Good luck,
ray
Re: Value of Park? - Posted by Bill K. - FL
Posted by Bill K. - FL on January 18, 2000 at 08:30:28:
You are a good example of why people should educate themselves in the basics concerning the income approach to property valuation when dealing with commercial property. You are out of your league until you do. And if you don’t learn the basics you will pay
dearly for your lack of knowledge. Once you understand the basics then you can benefit from Doug and Rays comments. Do yourself a favor and buy a book from your local college bookstore on RE Finance that goes over the different approaches to property value and read it. You have to crawl before you can walk.
Re: Value of Park? - Posted by DougO(NM)
Posted by DougO(NM) on January 17, 2000 at 23:38:50:
What Ray is talking about below is your statement that you can buy the place at $15,000 per space, then sometime in the future it will be a money maker. You are buying a cash flow, and this guy is missing 80% of his. In other words, you should be paying him $3,000 per space, since he’s only getting 20% of the income today. YOU have to do the work to make it worth the $15,000. If you pay $15,000 per space, then do the work to fill it up and regain the missing 80% of the income, how much will some one else pay you ? It’s a tough sell, but you can only afford to pay a price based on what the park is generating RIGHT NOW ! Is there a compromise somewhere in between ? Probably. Have you figured out the current NOI (with current icnome, expenses) and valued the property based on a cap rate ? Perhaps you could pay him for the value of the current cash flow plus a nominal amount representing the cost of the land/improvements(less depreciation) for the vacant sites ? Food for thought
Doug
Re: Value of Park? - Posted by ray@lcorn
Posted by ray@lcorn on January 17, 2000 at 23:05:54:
Ron,
Why would you want to pay the present owner for for work you have to do?
ray
Re: Value of Park? - Posted by Ron Thompson
Posted by Ron Thompson on January 20, 2000 at 01:36:29:
Thanks for your help, and I do realize that is what it is. I never thought your were being anything but helpful. I just didn’t understand what you meant.
The people who take the time to respond are a valuable resource, and thanks are always in order.
Re: Value of Park? - Posted by Ron Thompson
Posted by Ron Thompson on January 17, 2000 at 23:55:32:
Ok, I understand your thinking there. Sorry for seeming dumb.
I really don’t think I could get the park for 3k per space, but it would be nice! Besides valuing it based on recent income, there is too much basic value to get away with that. The present owner has had this park since 1972 and has made a good living with it until his illness. There are over 50 homes that belong to the park. I intend to take your advice and try for some financing on the homes themselves to aquire this property. That would allow me to sell them ALA ‘Lonnie deals’. I think I will make more this way than selling the homes for the down payment.
Thanks for helping me get my thoughts straight.
Re: Value of Park? - Posted by Ron Thompson
Posted by Ron Thompson on January 17, 2000 at 23:15:58:
I must have missed something. How would I be paying the present owner for something I have to do?
Re: Value of Park? - Posted by DougO(NM)
Posted by DougO(NM) on January 18, 2000 at 13:37:48:
You are getting some very good advice from Ray and I, and (taking the liberty to speak on Ray’s behalf) we are happy to do it. Why ? Probably because it wasn’t as easily available to us when we were getting started. You can do this deal and I hope you do. I just want you to get paid, help the seller, and create long term value. Get over there and point out what we’ve told you to the seller. Those vacant homes are, in my opinion, at this point, a liability, and can suck down money you (probably) don’t have faster than you’d ever believe. (unless they are all in pristine condition, which I doubt) I tell you this because I know, I’ve been and am still “there”. This is a candidate for a low or no down deal if there ever was one. You need to get to be friends with the seller. Not a fake friend trying to take advantage of him, but someone interested in helping him get what he wants so you can get what you want. Really, make him understand he’s got a vacant aprtment building with wheels ! Who wants that ! Rays suggestion of shared appreciation and cash flow to the seller AFTER YOU GET PAID is a good one. Perhaps he’ll see the wisdom.If not, PASS.
Good Luck
Doug
Re: Value of Park? - Posted by Ron Thompson
Posted by Ron Thompson on January 20, 2000 at 01:42:30:
Good points, all. Thanks. I’ll consider this and try for a better deal