Help evaluating Mobile Home Park and strategy to increase value

10 Replies

This is the first MHP deal I have analyzed and would like to hear your opinions about it--

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-104 total sites, 68 owner-occupied, 36 vacant on 3.5 acres

-On city water/sewer

-Lot rent is $310 and at market rate

-Assumable loan of $1,365,000, due June 2019, at 4.9% rate

-Buyer would need downpayment of $535k

-68 lots x $310 x 12 x .6 x 10 = $1,517,760 value at 10% cap

-List price is $1.9M

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If I paid the $535k down payment with a local bank loan for $435k at 6% amortized over 20 years after a cash downpayment of $100k, the monthly NOI, after 40% expenses and debt service (for both loans), would be $10k/month.

The value-add strategy I'm considering is to take that monthly 10k NOI and buy/move in homes until the park is full. If each relocated home costs $10k, it would take 3 years to fill the park.

At the end of those three years, the park would be 100% full (104 sites), monthly NOI would be about $18k and the park would be valued at $2.3M using a 10% cap.

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Questions

1. The list price is $400k higher than the calculated value of $1.5M… likely because the current owner sees the growth potential in the pro-forma numbers. How would you negotiate the price down to $1.5M?

2. Is my strategy sound regarding spending 36 months of NOI to fill the park with units so I can collect lot rents?

3. Would a local bank loan $435k on this deal?

4. Is this a deal worth pursuing?

Thanks, Dave

The first part is qualifying for the assumable loan.

I would imagine if you have over half a million to put down and steady income the chances would be in your favor.

The key is does they loan HAVE TO be assumed?? We have what is called "defeasance" penalties which is a pre-pay penalty on the loan. These penalties can be substantial sometimes and usually decrease in fees when the loan gets closer to coming due. This is why sellers say sometimes the loan has to be assumed because they do not want to eat the penalty when selling paying off the loan early.

The seller might see potential but they are not working to create that potential. They are saying " I am too lazy to put in the work or time for the potential but pay me for it anyways." They want to eat the cake without making it. Does upside have some value when selling? Sure they seller can get a little more but not middle to full value of the upside realized in the selling price. The whole thing with this is seller motivation. If they are not motivated and will not listen to reason do not waste your time.

Is the total land 3.5 acres or are you saying the vacant 36 sits on just 3.5??

Who pays gas, electric, water, sewer? Tenant or owner?

First, I don't like to pay for potential. I want to pay for what is.

2nd. I don't think the bank would loan if it is not in first place.

3rd. I have been advised that my first MHP should be one that does not need fixing.

4th. It is hard for me to imagine that you can spend only $10,000 per home to place the type of homes you want in your park. You would then be getting rent for the home and lot but you would have greater expense because you would be responsible for the homes.

Can your area absorb 36 more sites? Luck.

Bill

Good

It's best to go with current numbers versus potential ones when analyzing deals. This would change the figure dramatically which is a good starting point and more accurate reflection of the value of the asset. To help with the negotiations, this information would need to be presented to the seller.

Regarding moving homes into the park, it's probably a good idea to do some market research on the going rate in your area for the types of homes you're planning to move. Also, having a reliable inventory source will help to speed things up. In the past, I've found mobile home dealerships to be a good resource since they consistently receive calls from both sellers and buyers.

Hope that helps, good luck!

Joel, I didn't know about defeasance penalties, but that would explain why this seller does insist that the new buyer assume the loan. It does seem that the seller wants the benefits of selling a full park without having done the work to fill it. Regarding your question about acreage, the total land is 3.5 acres for all 104 lots... does the density seem too high for a good park?

Aaron, the water, sewer, electric, and gas are sub-metered and billed to the home owners.

Bill, thanks for your advice in Point #3 about my first park not needing fixing--I will consider that. Regarding Point #2, I also wonder if a local bank would do a second place loan behind the assumed loan. On your Point #4, about 10k not being enough to move in a home, maybe I'm not budgeting enough.... I was thinking about $7k for the home and $3k for transport and installation. Regarding if there is demand for another 36 homes, I would need to validate this with a Craigslist add to see what kind of response I get. There is a smaller MHP alongside of this one; I talked to this park's manager who said there is steady demand for his homes, so I think there would be demand for more homes, but this would need more validation.

Rachel, I agree with you that I would need to open negotiation by using current numbers vs potential. How do wise / experienced MHP buyers know when to pay a premium for certain opportunities and situations? Also, thanks for your advice about contacting Mobile Home Dealerships as a resource for quickly filling a park. 

@David Hughes From what I've seen as a MHP broker is the buyers that pay premiums are usually in a 1031 tax deferred exchange or a REIT.

Unless this property is located in the path of development (ie. future for it is not as a MHP but as another Class A use after being sold for a premium for the land value), then the major flaw I see here before all else is your choice of using a 10 CAP!

You are buying a LOT of work.  This is not to say that it couldn't be a money maker for you, but buying a property at a premium valuation that is NOT in premium condition (strong rent roll) is a formula for disaster.  You have not planned on the OTHER side of the coin.  What do you do if your occupancy drops?  What do you do if the other units aren't absorbed?  What do you do if you have a major failure in the water distribution system and have to replace some/all of it?

With a balloon due in 5 years, you had better have a huge cash reserve set aside before taking on this project.  Otherwise, somebody like me might be talking to your lender in  5 years about buying it at a steep discount to clear it off of their balance sheet.

In my opinion, from hundreds (or thousands) of miles away, your analysis is flawed by overvaluing the park by using the wrong CAP rate. Keep in mind that just because the seller wants a particular price, that doesn't mean it is worth that much or even a particular percentage of that amount. It is worth what YOU can buy it for and safely make a return on it that you can live with, even if you run into some obstacles working through your turnaround plan.

My intent isn't to sound cocky in my response.  I have alarm bells going off in my head and I just want you to be aware that I think you should take a couple steps back and look REALLY hard at this deal.

Best of luck!

@Adam Johnson This property is not in the path of future development, so the premium price would not be for that reason. What CAP would you put on this deal, if it is not worth 10?

You are right that I would be buying a lot of work and there is risk if occupancy drops.

Regarding a 5-year balloon, in what situation is that a risk worth taking? Or do you typically look for 7-10 year balloons or, ideally, a non-recourse seller financed deal?

I didn't take your comments as cocky, by the way. I appreciate the "alarm bells" which force me to study the deal further.

Thanks!

@David Hughes  

Point #2, I also wonder if a local bank would do a second place loan behind the assumed loan. 

Unfortunately, this 2nd mortgage is essentially mezzanine debt and I've yet to talk to a bank willing to take a 2nd on a mobile home park. As all things, cap rates are subjective so underwrite it to a value that meets your return objections and then make that offer. Don't worry about what the seller is asking for.  I highly doubt he's being flooded with offers (even low ball offers). 

If / when he comes back with a no or counter, than perhaps you can make a slightly higher offer with a meaningful seller second mortgage. I would push for a very low interest 2nd that extends well beyond the term of the assumable loan. 

Ask for the promissory note so you can include any pre-pay or defeasance (yield maintenance) fees in your analysis. 

Your capital budget for homes is too light - unfortunately you're going to have a hard time finding 36 homes sub (post HUD) $7K homes that you would want to put into your park. Many of those will likely need another $3-$8K rehab budget just to make them comply with laws.

Also, perhaps I missed something but I believe you're suggesting a ~95% LTV total financing (the $1.36mm assumable + $435K 2nd mortgage) of the purchase price. That is a scary proposition (especially for your first park). You will have no margin for error, and just about 100% of your NOI would need to go to servicing the first and second mortgages (Not sure how you got to $10K month free cash flow based on the numbers you've provided - $150K NOI). Therefore you'll need to come up with additional capital for reserves and to purchase homes.

Also, I would encourage you to have a minimum of 1.5x debt service coverage and over capitalize the deal to ensure that you have enough to cover a capital improvement hiccup "Hello, this is your property manager, good morning, how are you? So.....a couple of the sewer lines just caved in, what do you want me to do?" and enough ammo to go out and buy solid homes that won't fall apart on the highway during transit and make you the lead story on the 5 o'clock news. 

Bottom line - I would probably move on, but perhaps you should toss in an offer at $100-$200K over the assumable note to see if he's willing to deal. You never know maybe he's getting tired of running it. 

Originally posted by @David Hughes:

@Adam Johnson This property is not in the path of future development, so the premium price would not be for that reason. What CAP would you put on this deal, if it is not worth 10?

You are right that I would be buying a lot of work and there is risk if occupancy drops.

Regarding a 5-year balloon, in what situation is that a risk worth taking? Or do you typically look for 7-10 year balloons or, ideally, a non-recourse seller financed deal?

I didn't take your comments as cocky, by the way. I appreciate the "alarm bells" which force me to study the deal further.

Thanks!

I don't want to muddy the water for you any more by suggesting a CAP rate. Your deal is a cash flow play to turn it around. Structure the deal so that it cash flows positive throughout and creates enough to support boosting occupancy.

Regarding the balloon, my main concern is the timing.  A suggestion how to minimize your risk might be to suggest a deal structure with an "escape" route of some sort.  I just did a similar deal where I structured it as a lease with an option to buy.  I paid a fee up front (my "risk") to buy an OPTION.  During the option period, I have full control of the property and I am responsible for all repairs.  If things really go wrong, then I will lose my option money.  However, in my deal, my option payment was 25% of the amount I would have had to come up with for a down payment, so it improved my liquidity situation at the same time as reducing my risk.  My deal didn't have a balloon, but it did have many of the same "what if's" that I listed in my earlier post.

In my opinion, you must first plot out a reasonable cash flow that allows you a pretty comfortable cushion to deal with the balloon in 5 years.  Build your other terms around that, including price.  Don't get caught up in having to make a deal work yet.  Go through this with an open mind.  You MIGHT be able to make it work and get the seller to agree and you might not.  But don't get blinded by the idea before you know you can make the idea profitable and reasonably safe.

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