The industry standard formula to evaluate a park is
# of lots x caps x 12 months x expense factor x lot rent ($)
I understand it is basic and we should consider the market and etc.
I do my offers based on the formula. However, many park owners come back to me with unrealistic (2 times or 3 times) asking price. They based their asking price on appraisal they did with real estate appraisal. How is accurate part appraisal? Is it is not very accurate, how can you explain it to a park owner?
Owners don't care about your "investor formulas", some times they just 'feel' the property is worth more. Never have I persuaded an Owner with Cap Rate or any other math formula. You have to understand what they really want from a Buyer; some are just looking for a kind soul to appreciate all the hard work they put into building park. The formula is just a starting point for you but if the numbers don't work for you walk away; run if they are completely unreasonable. I gladly tell them to call over investors and real estate agents to see what they have to say. Very few do and those that do, always call me be back b/c most investors and agents have no idea what to do with MHP leads. It's a true niche.
There are very few appraisers who specialize in MHPs and they are strictly looking at either land value for comps and rent or Income approach (10% Cap Rate). This is useful for your lender purposes but can give sellers a false idea about the real value of the property. One angle I sometimes take is to explain to them all the additional expenses we, as new owners, will have as opposed to them who do much of the work themselves as well as debt service.
Try to build a good rapport with your Sellers and find out if they won't come down on price if they will do owner financing and offer terms. Also, do the owners have solid books to back up their asking price? If they are not reporting ALL of the income to the IRS, they have little to justify an asking price that isn't based on auditable books. Many owners accept cash payments and under report true income then expect a Buyer to "trust them."
We've been in your shoes. Sellers want to 'cap rate home rent too" where bank appraisors and buyers want to only pay for lot rent or lot rent equivelant.
Maybe Jefferson can offer a winning approach?
My approach has been to enlist a seasoned park appraisor (for a price) to talk to the seller about the bank's view of what a park is worth.
If the park has to be bought with financing, the seller with HAVE to adjust. If they are offering seller financing, the fiction can be kicked down the road via financing a too high a price.
@Belinda Lopez Thank you for the detailed explanation. I had couple lead from my direct marketing campaign. Those owners are not extremely motivated to sell, but they want to know my offer. Do you think it is not worth explaining to a park owner how I came up with my offer?
@Curt Smith thank you very much for the explanation. I will try your approach.
I know everybody has their own technique and not many would like to share, but it worth to ask. How would you follow up with a park owner who think your price is too low and not interested in it.
I would suggest that you keep in touch by telephone or passing by every month to six weeks. you are attempting to establish rapport and some kind of relationship so that when he decides to reduce price or comes to understand that you are closer to the market than he was then he turns to you over those he might have spoken to in the interim.
Yes, feel free to show them your formula and how you came up with your offer. I've shown several sellers my spreadsheet analysis and explained that it was based on certain assumptions and information they provided. IF all their info was spot on, then it's their numbers that brought you to the offer. The come back they told me was that they expect a new owner to put in some sweat equity into a property since they've built up the property. Most sellers aren't sophisticated enough to understand overly complex formulas or EBITDA analysis. They just know what they make on the property and assume a new owner will be making the same.
If your formula doesn't agree with seller valuations, then it's by definition not market value. To be honest, the formula you provide always smelled funky to me. Sure, it can be helpful if the seller doesn't keep books. But if a seller has clean and complete books showing a certain NOI, wouldn't it be more accurate to value the park based on those real numbers than assumptions in the formula? Ignoring actual financials to make excel give you a lower valuation doesn't smell like a more accurate method of valuation to me. But then, I guess accuracy isn't the goal of that formula. Is it ;)