how do i value a MHP with private sewerage and/or private water

[Tado Marinho]

Hello BPers,

how does one value a MHP on private sewage and/or private water? what expense ratio should i use? also what sort of cap rate should i apply?

[Account Closed]

As far as a quick expense ratio goes, I typically use 50%.  A lot of your expenses with private utilities will be dependent on the state and even county the park is in.  For example:

Wells require testing.  Some areas require this testing to be done more frequently than other areas.  Wells also require some periodic maintenance, but this is usually not too expensive.  In addition to testing, your risk of owning a park on a well can vary depending on numerous factors.  A lot of parks with a well also have a back-up well that is capable of carrying the park.  If the one you are looking at does not, then there is obviously a far greater risk.  If your park is unable to connect to municipal services, there is also a greater risk.  If you have a well in conjunction with a private sewer system, then the potential for accidentally polluting your water supply is a little greater.  

Septics typically require periodic pumping.  These expenses need to be factored in to your numbers even if they are not reflected on the seller's P&L.  Certain states/counties have also made it very difficult or impossible to replace leach fields so this could be a factor depending on the location of the park.  The size of the lots is a definite factor in your ability to replace a leach field.  The most desirable septic/home ratio is 1:1.  i.e. If you lose a septic, you only want to be down one pad.  Having municipal sewer at the front of your park is not much of a bonus since a septic layout does not have a common connection point.

WWTP's require a licensed operator and permits.  These are generally fairly safe systems to own, but they do get a little expensive.  The big knock on these is if you do experience a problem, it's usually a very large capital item.  For this reason, it is wise to only consider a park with this that does a considerable amount of revenue.  More often than not, you should avoid WWTP's if the park is less than 75-100 pads.

Lagoons are an all around bad idea typically.  I'm not up to speed on the operation of these, but I do get a lot of phone calls from owners who have lagoons that are in distress.  You should really only consider this system if municipal sewer is available.

As for a CAP rate, that would be up to you. I am not a fan of private water/sewer so I generally try to run my numbers very conservatively. It's not to say that I won't buy one though. I'm under contract right now for a park on septic. For me, I like to use very conservative numbers, have owner financing, and see a cash on cash that is at least 25% in year 1.