Re: Value of Park? - Posted by ray@lcorn
Posted by ray@lcorn on January 18, 2000 at 10:42:02:
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.