Older Mobile Home Park - Deal or No Deal?

9 Replies

Backstory: 

My spouse and I have been going back and forth with the sellers of a mobile home park now for about half a year.  The owners of the park were an older couple until the husband passed away unexpectedly.  Now the sole owner is overwhelmed and anxious to sell and retire.  The owners kept all of there notes on notebook paper in folders and always showed a loss on their taxes.  They also collect only cash and pay the property manager only in cash.  

The deal: 

2 separate 5 acre parcels (not contiguous, but on the same road and on the same well).

One 5 acre tract has a small, very old house and 10 older mobile homes (1 belongs to the on-site, long-term property manager).  Each home sits on about 1/2 acre.  There are 3 septics that service the entire property (the way the owner described them seemed adequate, but there is no record of the septic field with the County Health Department). 

The home and mobiles are all rented currently, and at any given time, probably 8 out of the 10 are rented. 

The other 5 acres has a 1500 sq ft 3 bed, 1 bath SF home in good repair with a 2100 sq ft metal shop (also in good repair) and then has 3 mobile homes separated a good ways from the house and on their own septics.  

All of the properties currently get their water from a well that is on the 5 acres with the 1500 sq ft home and shop.  City water is at the street and could be connected in the future. There is no sewer in the town or close enough in the next town over to make it feasible yet, but there is a new highway being constructed at the edge of this town that has everyone oozing with expectation (less than a mile from this property).   This particular town has been outside of the radar, but the towns around it are EXPLODING!  People are just starting to buy up the property that has been on the market for a while and now there is almost nothing for sale here in this town.  

We have offered the owner $340k total for everything:

$10k down, $240k in bank financing, and $90k in owner 2nd position financing.  

[The bank is offering a 5 year fixed ARM with balloon, on a 15 year amortization, 4.9%and we've talked the owner into a 15 year am with a balloon payment in 5 years on the 90k, 4%.]

With our low DP and bank terms amortized on the 15 year note, we are only projecting a cash flow of about $470 or if we can talk the owner into a 30 year amortization to base the monthly payment off of then it would be around $710.

14 units would be under our care, some with some deferred maintenance (exterior painting and leaking roofs), and one shop building.  

We could potentially add more units, at least a couple more, but to add a significant number would require a complete overhaul of the septic systems (I don't know a lot about that yet) or eventually connect to a sewer.  

With all the moving parts and the potential for big headaches, I'm not sure the current cash flow can justify the investment.  

We originally envisioned allowing the property to pay itself off and building apartments in the future when sewer comes to town, but we're still nervous this property may suck the life out of our souls.  

Deal or No Deal?

[10k is all that we have at the moment to put down, and while the seller might be willing to finance more, we are not sure we could refinance at the end of the term or come up with more than 90k to meet the balloon payment.  She is in poor health and would not likely be willing to owner finance the entire thing. ]

$470 is way too low in case of any emergencies and a park changing hands is a perfect opportunity for local officials to require to bring everything up to current code; even if the park is grandfathered.  That septic setup is huge issue; even though the owner says it's adequate - what are the current state & local regulations regarding septic?

What are the rents?  What are the years of the homes?  can they even be insured?  The bank will not finance without an appraisal, current survey and it could end up costing much more to just get the loan.  We try to get parks at a 10% cap rate or higher.  So if the price is $340k, is the park bringing in at least $34k Net a year?  

I know it's hard to walk away from a property when you've been working on it for so long; we have two we've been working on over two years now, but if the numbers don't make sense or if you are just inheriting someone else's problems then you need to walk away.  We show owners like this our calculations and explain that without proper financials, there is no way to justify the asking price and for us to get bank financing.  We even offer to have our team create/recreate proper books for them but few take us up on the offer.  There's a great resource out by Parks & Places on Getting your RV Park/Campground ready to sell that is also applicable to MHPs. I'll send you a copy.

You say the new highway has people anticipating an influx of new residents? 10 acres partially developed for $340k sounds pretty good. Especially with city sewer and water, if you can make that work. 

Consider this. "For sale in Awesometown Arkansas, your opportunity to purchase your very own quarter to half acre lot! City water and sewer already in place! Your very own place in the country!"

10 acres could get you 20-40 plots or parcels or whatever your county calls them. Selling land to builders or homeowners beats trying to collect lot rent from current residents.

Eddie

I agree with @Belinda Lopez on this, especially the risk with the umpermitted septic.  Also your well is servicing just below the threshold for EPA oversight (15 homes or 25 occupants) and adding more units is not an option without a load of additional regulatory compliance.

The only thing you might consider if the shape of the lot works is to parcel off the single family homes and sell them to pay down your debt service. Then use the residual mobile home income to cover the balance. Maybe the numbers make sense after that. But then you would have to put in new septic for the SFH's and have some issues there.

This isn't a deal I would do unless I could work out the septic issue and had budget to move to city water.

@Ashley Harris   cap ex will kill you .. your woefully undercapitalized for this project.  Unless you have 50 to 100k liquid or more for the unexpected or gov regulations catching up to you... I have a hard time believing a bank would make that loan as well....

careful on this one..

Originally posted by @Belinda Lopez :

$470 is way too low in case of any emergencies and a park changing hands is a perfect opportunity for local officials to require to bring everything up to current code; even if the park is grandfathered.  That septic setup is huge issue; even though the owner says it's adequate - what are the current state & local regulations regarding septic?

  • I agree. The local city is pretty friendly, so I could get the info I need from them, I need to continue due diligence on the septic.  I've been invited to join the planning commission.  

What are the rents?  What are the years of the homes?  can they even be insured?  The bank will not finance without an appraisal, current survey and it could end up costing much more to just get the loan.  We try to get parks at a 10% cap rate or higher.  So if the price is $340k, is the park bringing in at least $34k Net a year?  

  • The rents range from $340 - $400.  Some are collected weekly, some bi-weekly, and others monthly by the property manager (cash).  
  • The mobiles are ancient (pre-70's I believe, but the owner installed 1/2 drywall and regular 1" thick subfloor inside.  I think they have only painted the roof with that aluminum paint, not sure what types of repairs have been done there.  (My husband used to run a residential remodel company and is pretty confident he can do roof repairs - we'll see).  The exteriors desperately need to be repainted.  
  • The city says about $300 per meter for each unit to go city water, of course that doesn't include the plumbing on our end.  
  • The owners currently have insurance on the properties, and I believe I checked with a carrie about a policy, but it's been a few months since then and I need to re-check that, making the age of the homes very clear.  
  • The owner lives in the 1500 sq ft house, and uses the shop for the supplies and equipment used to service the park and to park their vehicle. I thought I could potentially rent the home for $850 and the shop for $300 (hopefully to the same person). The mobiles are far enough away from the home, with a separate driveway to make the home feel private ( but based on the lay of the land, to subdivide and sell the SFH would be tricky).

 According to my calculations Net Income: $36,228 and Cap rate 10.65.

If I could get the owner to drop the price to $290 and then get her to amortize her side of the payments over 30 years, this thing would cashflow (after debt service) about $1045, but I still wonder if that is enough--all things considered.  I'm certain we will run into some deferred maintenance.    

Originally posted by @Jeffrey H. :

I forgot to ask - how does the one well service two non contiguous properties?  Is there a deeded easement on all properties between for the water line?

 The owner explained this in detail, the head property where the well is located is where the owners reside (with 3 mobile homes), but I must admit that I can't regurgitate the information (probably not a good sign).  The head property is maybe 1000 ft MOL up the road from the other property with the 10 mobiles and small house.  I am almost sure that there is no recorded deed at this point because the owners bought the property with the well and then commenced adding mobiles and septics over the years.  

The septic is a big turnoff, but an even bigger problem is the apparent value being given to some very old homes. A pre-1970s home in even decent condition is only worth a couple of thousand and the maintenance is gonna eat you up. What are lot rents in the area? I'd be looking to structure a deal with the plan to sell off the homes and just collecting lot rents. Valuation would be based on lot rents and rents on the stick built homes.