Determining the Value of Your Mobile Home Park
Purchasing or refinancing a mobile home park with park-owned homes can be a confusing process when attempting to determine the value a lender will consider. The real estate portion of the park can be fairly straight forward, but the mobile homes owned by the park can vary as to how to determine their value.
When analyzing the real estate portion of park, the income and sales comparison approaches are the most significant. The cost approach, many times is not included in the report and not a relevant factor in most transactions. The income approach is determined by calculating the income generated from the pad rents based on current occupancy and subtracting the operating expenses to come up with the net operating income (NOI). The NOI is divided by the market capitalization (CAP) rate to calculate the value based on income. This is a fairly quick analysis and assumptions to the CAP rate can be made to see if the estimated value is in line. We usually use an 8.50% - 10.00% CAP rate in most markets at this time. The sales comparison approach requires information on mobile home parks sold in the same geographic area within the most recent 3 years at the most. Several adjustments can be made by the appraiser when comparing parks to one another to include condition of the property, occupancy, lot sizes, specific market location, etc. The appraiser is ultimately coming up with a value per pad site and multiplying that figure by the number of pads in the park.
When a client presents their rent roll and operating statements on a park, we can rough out the numbers to see if the income approach to value is reasonable for the proposed loan amount on a refinance and purchase price on an acquisition. This is a great place to start when considering financing a park so as not to head down a path that does not make sense based on the borrower's expectations. This allows us to see where we stand as far as the real estate value.
The variable that can be quite confusing is coming up with a value for the park-owned homes. As many deals have mobile homes as part of the value, this can be a significant portion of the transaction. The age, size, make, model, and condition of the units are all considered. Their value is based on a depreciated basis and may be provided by the appraiser or NADA values can be used. We typically have the owner of the property complete a mobile home worksheet that provides the above information on the units as well as their rental income or note income and sales price to the tenant if not a rental. Older homes (built prior to 1980) are considered a negative factor and the newer the homes and the better condition they are in will significantly improve the value.
The underwriting of the transaction takes into account the value determined on the real estate and the value of the mobile homes as well as evaluating the total net income from both the pads and the units. The debt-service-coverage-ratio(DSCR) is calculated by dividing the net income by the proposed annual principal and interest for the mortgage. We are typically looking for DSCR's equal to or greater than 1.30 when using the park-owned homes in the equation. The mistake many buyers and sellers make is attempting to value a park using the income approach on both the pads and the park-owned mobile homes. This can inflate the value of the units beyond their actual market value.
When financing these types of parks, we typically provide one loan collateralized by both the real estate and the mobile homes. The amortization is usually 20 years and the term up to 5 years. Interest rates currently range from 6.50% - 7.50%. In other instances, we are able to provide a loan on the real estate and a separate line on the mobile homes. This structure is more often used when the borrower intends to acquire additional mobile homes for the park and would like the loan on the mobile homes to be in the form of a line of credit.
Evaluating park financials is different for every property as owners operate in a variety of ways. Understanding where the lender is coming from is extremely important when negotiating purchase prices or expectations for a refinance of existing debt. We can use the above approach on parks nationwide with loan amounts from $400,000 to $2,000,000.
Steve Murden
Star Capital Corp.
(540) 342-6520
[email protected]
www.starcapitalcorporation.com
When analyzing the real estate portion of park, the income and sales comparison approaches are the most significant. The cost approach, many times is not included in the report and not a relevant factor in most transactions. The income approach is determined by calculating the income generated from the pad rents based on current occupancy and subtracting the operating expenses to come up with the net operating income (NOI). The NOI is divided by the market capitalization (CAP) rate to calculate the value based on income. This is a fairly quick analysis and assumptions to the CAP rate can be made to see if the estimated value is in line. We usually use an 8.50% - 10.00% CAP rate in most markets at this time. The sales comparison approach requires information on mobile home parks sold in the same geographic area within the most recent 3 years at the most. Several adjustments can be made by the appraiser when comparing parks to one another to include condition of the property, occupancy, lot sizes, specific market location, etc. The appraiser is ultimately coming up with a value per pad site and multiplying that figure by the number of pads in the park.
When a client presents their rent roll and operating statements on a park, we can rough out the numbers to see if the income approach to value is reasonable for the proposed loan amount on a refinance and purchase price on an acquisition. This is a great place to start when considering financing a park so as not to head down a path that does not make sense based on the borrower's expectations. This allows us to see where we stand as far as the real estate value.
The variable that can be quite confusing is coming up with a value for the park-owned homes. As many deals have mobile homes as part of the value, this can be a significant portion of the transaction. The age, size, make, model, and condition of the units are all considered. Their value is based on a depreciated basis and may be provided by the appraiser or NADA values can be used. We typically have the owner of the property complete a mobile home worksheet that provides the above information on the units as well as their rental income or note income and sales price to the tenant if not a rental. Older homes (built prior to 1980) are considered a negative factor and the newer the homes and the better condition they are in will significantly improve the value.
The underwriting of the transaction takes into account the value determined on the real estate and the value of the mobile homes as well as evaluating the total net income from both the pads and the units. The debt-service-coverage-ratio(DSCR) is calculated by dividing the net income by the proposed annual principal and interest for the mortgage. We are typically looking for DSCR's equal to or greater than 1.30 when using the park-owned homes in the equation. The mistake many buyers and sellers make is attempting to value a park using the income approach on both the pads and the park-owned mobile homes. This can inflate the value of the units beyond their actual market value.
When financing these types of parks, we typically provide one loan collateralized by both the real estate and the mobile homes. The amortization is usually 20 years and the term up to 5 years. Interest rates currently range from 6.50% - 7.50%. In other instances, we are able to provide a loan on the real estate and a separate line on the mobile homes. This structure is more often used when the borrower intends to acquire additional mobile homes for the park and would like the loan on the mobile homes to be in the form of a line of credit.
Evaluating park financials is different for every property as owners operate in a variety of ways. Understanding where the lender is coming from is extremely important when negotiating purchase prices or expectations for a refinance of existing debt. We can use the above approach on parks nationwide with loan amounts from $400,000 to $2,000,000.
Steve Murden
Star Capital Corp.
(540) 342-6520
[email protected]
www.starcapitalcorporation.com
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