Valuation of a MHP?

10 Replies

I have been Offered the opportunity to buy a MHP. How do I determine if the asking price is too high? The city tax data has the property appraised at $220k. None of the MH's are owned by the seller. They just collect lot rent. There are only 8 units with no opportunity to add anymore. The lot rents are $400. There is also a small SFH that is included in the deal and is part of the $220 k appraisal. The SFH is a rental unit as well and collects $800. Is there a formula to use for this? This is more complicated than just a SFH or just a MHP. Two of the MH owners are currently over 6 months past due on rent.
Thanks!

Yes in general commercial property has developed simple cap rate based formulas for each property type.  For MHP park with city untilities (I'll assume city sewer and water directly billed to the renter)

# of units x monthly rent price x 12 x 0.7 (30% expense ratio) / 0.11  (11% cap rate for an offer, then settle on 10% cap rate).

So for your situation:

10 (the SFR counts as 2 units) x $400 x 12 x 0.7 / 0.11 = $305k offer price. Settle for $336k

30% expense ratio is an accepted ratio for occupant owned homes (just lot rent).  If park owned homes expense ratio goes up to 50%.  If park owned wells and or septic, higher then 30% expense ratio for occupant owned...  The devil is in the expense ratio and the park details re utilities and park owned vs occupant owned.

If the seller will agree to $220k that seems like a good price.

Unless this is in FL or some high lot rent place I doubt $400/mo is just lot rent.  A risk is that it's home rent and the homes are really park owned.  Then expense ratio jumps to 50%.

Connecticut might be expensive. The nice parks near me charge 350ish, including water/sewer/trash. Kate, who pays the water/sewer/trash at the park you are looking at?

@Curt Smith  thanks for that explanation with the math. That was well explained and laid out.

@Paul S.  Tnx Paul for saying!!  

I strongly recommend going to the boot camp by mobilehomeuniversity.com.  They are the tops in the MHP operating and their side business of training.  As you'd want, you want the trainer to be an expert first and trainer 2nd.  That is the case with Dave and Frank.  Except Frank it seems loves public speaking and telling hair raising real world park management stories.  You'll learn a ton from the material, but a ton more and side splitting laughs from his park operating stories.

@Curt Smith  thanks for the tip. I did see the bootcamp they put on but my schedule does not really allow me time to do that right now. Perhaps in a few months when I am retiring I will have some time freed up to check it out.

For the time being I will try to learn as much as I can on BP.

Paul

mobilehomeuniversity.com has an excellent forum of well seasoned MHP operators.  Where you can ask the hard or wierd stuff.  Good for you to check into that forum a few times a week if you are serious about buying / operating a MHP.

I would also add a deduction of 10% to potential gross rent to account for typical vacancy and credit loss. These properties are tricky and much harder to manage than most people think.

@Andriy Boychuk  

Yes the 12 is months, 0.7 is 30% expense ratio.  A 100% park owned homes would use 0.5 on the high side, if older septic and maybe well too then expense ratio is 60% meaning you are spending alot on park maintenance etc.  Sellers will holler that their expenses aren't that high and thats the negotiation process.

In reality the sellers are more right (that their expenses are lower than this formula) than the formula since they are deferring maintenance, it's not that they are so great at running their park. 

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