Good Deal?: 12 CAP - 24 Space Park Purchase

13 Replies

Would love BP MHP Pro feedback.

After analyzing over 100 deals I found this one.

1. Do you believe this is a deal?
2. Is there anything I should look out for?
3. Should I add anything?
4. Are the terms OK?

Until I increase lot rent in January 2014, I have $900 per month for expenses to work with.

Story:
I am purchasing a 24 spc park in a small family oriented town. I met with seller and he's sharp and has owned 7 parks. Looking to retire.

Deal:
24 occupied spaces
Asking: $365,000
Seller accepted $275,000

- $50,000 down, $2995 per month
- CAP rate actual: 12.1%
- CAP rate: 19.4%
(12 months pro forma at $100 increase in space rent, $265/spc, 30% expense)
- Terms: $225,000 Seller carry note 12 yr $2995 per month, 7 year 18% pre-pay penalty
- Space rent: $165
- Market rent: $280
- Gross rent/month: $3960
- All tenant owned homes
- Road: park, gravel
- Water: city
- Trash: city
- Sewer: city

Market Research:
- Schools: A (great high schools and private schools)
- Population: 5000
- Metro area population (1 hr) from 6MM metro
- Test craigslist ad pulls 20-30 calls per week.

Make sure it is not rent control.

Joe Gore

Swat, the only thing I don't like about the deal is the financing. You're negative cashflow until you are able to raise the rents.

Here's my spreadsheet:

I am assuming this is 100% occupied? My partner and I have acquired several manufactured homes but not mobile home parks so I am not familiar about all the expenses.

How confident are you that you can raise the rents? How come the current owner unable to raise the rents?

Swat,

Agree with Wendell. You might have negative cash flow.

Who pays the water? Tenant or owner?

If the owner pays it, the formula I've seen most often is 40% of gross rent should be estimated for expenses. So it would be 165 x 24 spcs x 12 mos x 60% = $28,512 net income Debt service $2,995 x 12 = $35,940. That would be a negative cash flow of $7,428 a year.

If tenants pay their own water, the estimate is 30% of gross rent for expenses. 165 x 24 x 12 x 70% = $33,264, giving you negative cash flow of $2,676 a year.

Of course, you need to see the actual expenses in detail.

Can you negotiate a lower payment?

your expenses are projected too low. Small parks hive higher percentages for expenses. I would figure 40% on the very low side, and probably if this is your first park, more like 50%.

You need to check out the market rents and make sure you comparing the same class of parks. If the other park has a pool, or paved roads etc that you do not, you need to account for that.

Be sure your figuring in bad debt of around 7% to your pro forma numbers or you are giving away income you are not getting...

Are you sure the market will bear a $100 increase?

@Joe Gore

Make sure it is not rent control.

Joe, no rent control my friend. :thumbsup:

Account Closed

Swat, the only thing I don't like about the deal is the financing. You're negative cashflow until you are able to raise the rents.

Wendell, I appreciate the analysis.

Agreed. I will see if he can do $2000/mo for first 8 months until we raise rents to build a cushion.

I am assuming this is 100% occupied?

24 of 25 are occupied.

How confident are you that you can raise the rents?

If this was in a bad area of town with bad schools, I wouldn't be very confident. However this area is very good, with 9/10 high school ratings. Also has a desirable private school.

How come the current owner unable to raise the rents?

I asked him and he said he didn't want to scare the tenants. He is currently raising rents at $10-15 per year.

@Leslie A.

Who pays the water? Tenant or owner?

Leslie, you are right, if the owner paid, it would put us in the red. the tenants pay all utilities.

Of course, you need to see the actual expenses in detail.

It's a mom and pop shop, where most of the expenses are handwritten.

Based on the numbers, since tenants pay all utlities and all of the homes are tenant owned, the expenses are low. The only expenses he has are taxes $1200, insurance $600, and 2 loads of gravel every year $600. He said he calls out the roto rooter for park sewage. He is responsible for the pipes between the main and each housing unit.

Like you, I factored in 30% on expenses, and it's a -$2700 break even park. The main concern is the debt service.

Can you negotiate a lower payment?

Leslie, yes good idea. He hasn't budged on the payment but that was early on in the process. Since then we went back and forth on the contract for other terms. In a nutshell, he wants $2995/mo with $50K down. Other terms are somewhat negotiable. Based on yours and @Wendell De Guzman comments, I will work on this. Maybe $2000 mo for first 8 months since he's getting $50,000 up front.

@Jim Johnson

your expenses are projected too low. Small parks hive higher percentages for expenses. I would figure 40% on the very low side, and probably if this is your first park, more like 50%.

Jim, thank you for the feedback. Are you suggesting we factor in 40-50% in expenses when tenants pay all utilities and no park owned homes? I was factoring in 30%.

You need to check out the market rents and make sure you comparing the same class of parks. If the other park has a pool, or paved roads etc that you do not, you need to account for that.

Jim, other park is the same except for paved roads. No pool.

Market rents:

1 bd: $525-600

2 bd: $650

3bd: $750

Be sure your figuring in bad debt of around 7% to your pro forma numbers or you are giving away income you are not getting...

What do you mean give away 7% in bad debt? Do you mean vacancy factor like if a tenant doesn't pay on time, or is late? Thx.

Are you sure the market will bear a $100 increase?

@Mark Bookhagen

Mark, would prefer to do it all in one increment though. We may have to do it in (2) $50 increments over 12-24 months.

Yes- expenses on smaller parks- even with the tenants paying all of the utilities are higher- probably 40% IF it is a space rent only park.

It seems, your renting the homes- and that is where you finding the extra 100 per month-is this correct?

last- 7% from the gross should cover an average amount you think you will collect but do not over they year.

Swat,

I believe I would insist on seeing tax returns and bank statements for at least a couple of years, rather than taking their word for the expenses.

Hope you can get it all worked out and make a great deal for yourself.

@Jim Johnson :
Yes- expenses on smaller parks- even with the tenants paying all of the utilities are higher- probably 40% IF it is a space rent only park.


Jim, yes if we run it at 40% expenses, it will put me in the red due to the high $2995 payments until we increase the rents to $260.

It seems, your renting the homes- and that is where you finding the extra 100 per month-is this correct?
last- 7% from the gross should cover an average amount you think you will collect but do not over they year.

Comparable space rent in the market is $280. This is where I would like to bring the rents to. I ran a test ad for mobile homes for rent-to-own @ $500 per month (around the cost of a 1 bd for a apartment in the area) and I got around 20-30 calls per week. The overall region is very high occupancy.


There will only be space rent. I won't own any of the homes.
I believe I would insist on seeing tax returns and bank statements for at least a couple of years, rather than taking their word for the expenses.
Hope you can get it all worked out and make a great deal for yourself.

Thanks @Leslie A.

If you can get a the last 2 years of income and expenses, and the balance sheet you can create a very good snapshot on the parks value. You do not need tax returns... business owners stuff all sorts of junk in the business- I once was looking at a park back east where the owner was paying for his helicopter fuel as an travel expense. With that data, you can also add in reasonable and customary expenses, which all good appraisers will do. from there you will have a real, though modified net, then apply your cap and you will know if your good to go or not.

Originally posted by @Swat Khan :
he's sharp and has owned 7 parks. Looking to retire.

18% pre-pay penalty

1. Watch him carefully, he is probably trying to get you (not the park) to subsidize his retirement.

2. Will he budge on the 18% penalty?

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