Jacksonville Deal Analysis (in due diligence)

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Jacksonville Deal Analysis (in due diligence)

Elihu Bogan
Santa Barbara, CA · Member since 2015 · 20 posts · 3 votes

Hi BP! Long time reader, first time poster. I have a deal under contract that goes against most of what I've been taught from Frank & Dave, Jefferson Lilly and the other experts, but I can't shake it so I'd like someone to talk me out of it before due diligence closes in a week. The offer was well moer than I'd been taught to put out there, but some podcast somewhere did say 'when it doubt, get it under contract.' :) Without further ado, here are the numbers (I'm sure I'm missing something vital and will update as needed):

- Westside Jax (32244), Wal-Mart supercenter 2.5mi, 60k zip population, MSA 1.3 million population

- Unemployment 6%, Median home price $85-110k (border of two areas), median income $55k

- Rent for 2BR $970/mo, vacancy rate 10%

- $315k contract price, $65k seller carry @ 3.5% interest-only, 5yr balloon.

- 21 units, 1 unit $200 lot rent. Avg. for area is $250+ lot rent.

- 13 POH occupied at avg $550/mo ($6700/mo after collection losses)

- 40% expense ratio (after-purchase)

- Homes are all pre-HUD and not well kept up. 8 vacants are total guts or replace.

- Vacancies due to (extreme) neglect and negligence/deferred maintenance, not lack of demand. 

- Large lots (5 acres = 1/8 acre each + recreation space)

- city water and septic, sewer available right outside.

So, the rule of thumb is 14 units rented @ $200 lot rent * 12 mos * 50% expense ratio * 10 cap = $168k. Fully occupied would be 22 * 200 * 12 * 50% * 10cap=$260k lot rent only. Land appraised last year for a land-loan at $220k. Contract price is $315k, there are multiple cash backups going up to $350k at this point (for some reason, it's harder to walk away when you know there are other people willing to pay more...)

Now, I'm not foolish enough to capitalize the value of the homes, but any appraiser will tell you there is an income approach that will assign value to something that generates rents regardless of what it's made out of. By renovating the vacants (say another $100k including needed park fixes), I am confident I can get the rent roll to $10-12k with $415k out of pocket. At $150k, I can bring in 10 'new' trailers that would be probably preferred to 'polishing a turd' as my father would say. That puts me at $465k stabilized with $10k rents, which at the bottom of my spreadsheet works out to $6500/mo before financing, or about a 17-cap. Also hits 2.2% gross cash flow, which is the first time I've seen 2% plus on something over $50k around here.

Happy to update with missing details, please do not flame with anti-POH rhetoric, etc. I know this is not a cookie-cutter deal, it's just really high vacancy for a correctable reason.

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Curtis YoderPro Member
Rental Property Investor · Tulsa, OK · Member since 2014 · 241 posts · 187 votes
10y

I would take a look and separate your facts from your unknowns. Make a list of the unknowns and begin estimating the worst case for them, then best case. You have to come to an educated guess at what you are in for. If you show cash flow with the worst case and you can absorb getting there then you have your answer.

Maximize your income immediately. For instance, once your deal is closed you know you can buy a 20K mobile home, park it, and rent it for $X. Add value where you can,  easier to roll in a new trailer than putting 15 or 20K into one. You kind of did this but I would put on a spreadsheet, you may have already done so. The pump outs (inspections) of will give you a big check one way or the other as to the status of the septics. They are a simple gravity system and not that expensive in the whole scheme of things investing. Good luck to you!

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  • Bill Devola
    Wholesaler · Bogota, NJ · Member since 2016 · 128 posts · 64 votes
    10y

    I don't fully follow all your mathematical calculations.  In fact, I probably don't follow most of them.   I sounds like you know what you have though.  

    What I am following is the calculation that you are at a 17 cap with a little money put in. Which is obviously a good return.  If you're confident that in 5 years you can pay the balloon, I don't know how much there is to quibble with the financials.  We don't do MHP so there are people that can give you much better feedback on specific pitfalls.  But from a financial perspective it sounds good. Well, the part about $15K per trailer to bring in a new trailer sounds low.  But what do I know.  

    I also don't know what "sewer available right outside" means. You can hook in? Whats the approx cost? Here in the NE, septics are a pain in the ***. Read: expensive. In Jacksonville its probably different so maybe thats not even something you care about.   

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  • Kevin Schulte
    MHP Investor · Green Valley, AZ · Member since 2013 · 85 posts · 26 votes
    10y

    What are the POH worth as is? To you the buyer theyre worth maybe 75% of that because theyll cost you more in maintenance than the rent is worth.

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  • Elihu Bogan
    OP
    Santa Barbara, CA · Member since 2015 · 20 posts · 3 votes
    10y
    Hi Bill Devola thanks for the feedback. Yeah, I've never seen those rules of thumb outside the MHP space either, but figured someone would want to see it. $15k is actually pretty decent for a used singlewide I think. Some on CL going for $1-2k, but the install can run you $5-7k so they're never free. Brand new is about $30k in this area for a singlewide. It's really an average assuming I fix half at $10k each and replace half at $20k each, fixing those in the best shape to start with. As for septic, that's one of my big fears too! I'm set to schedule the pump outs and inspections today (22 at $250ea = $5500) so I'm doing a last ditch social call out in case I'm missing something obvious. Don't want to find out after I've finished cleaning out the seller's septics for him. :) Sewer is on the road, city person I called couldn't give me a cost for the private hookups to the homes, but said I'd need a private lift station at about $20k. So not likely unless everything falls apart at once.
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  • Elihu Bogan
    OP
    Santa Barbara, CA · Member since 2015 · 20 posts · 3 votes
    10y
    Kevin Schulte the POH are worth about $1000 each in scrap metal :) Any homes that I buy to replace them will obviously have some minimal resale value, but I don't know that I would give them away to tenants to charge $200 lot vs $600 for the POH. I guess the question is whether there's ever a time when its okay to own the homes. I don't think each home requires $400/mo in repairs (again, at that rate you could replace the homes every year or two), so there's some positive spread to collecting home rent.
    0Reply
  • Ken Rishel
    Specialist · Springfield, IL · Member since 2011 · 700 posts · 479 votes
    10y
    Originally posted by @Elihu Bogan:

    Hi BP! Long time reader, first time poster. I have a deal under contract that goes against most of what I've been taught from Frank & Dave, Jefferson Lilly and the other experts, but I can't shake it so I'd like someone to talk me out of it before due diligence closes in a week. The offer was well moer than I'd been taught to put out there, but some podcast somewhere did say 'when it doubt, get it under contract.' :) Without further ado, here are the numbers (I'm sure I'm missing something vital and will update as needed):

    - Westside Jax (32244), Wal-Mart supercenter 2.5mi, 60k zip population, MSA 1.3 million population

    - Unemployment 6%, Median home price $85-110k (border of two areas), median income $55k

    - Rent for 2BR $970/mo, vacancy rate 10%

    - $315k contract price, $65k seller carry @ 3.5% interest-only, 5yr balloon.

    - 21 units, 1 unit $200 lot rent. Avg. for area is $250+ lot rent.

    - 13 POH occupied at avg $550/mo ($6700/mo after collection losses)

    - 40% expense ratio (after-purchase)

    - Homes are all pre-HUD and not well kept up. 8 vacants are total guts or replace.

    - Vacancies due to (extreme) neglect and negligence/deferred maintenance, not lack of demand. 

    - Large lots (5 acres = 1/8 acre each + recreation space)

    - city water and septic, sewer available right outside.

    So, the rule of thumb is 14 units rented @ $200 lot rent * 12 mos * 50% expense ratio * 10 cap = $168k. Fully occupied would be 22 * 200 * 12 * 50% * 10cap=$260k lot rent only. Land appraised last year for a land-loan at $220k. Contract price is $315k, there are multiple cash backups going up to $350k at this point (for some reason, it's harder to walk away when you know there are other people willing to pay more...)

    Now, I'm not foolish enough to capitalize the value of the homes, but any appraiser will tell you there is an income approach that will assign value to something that generates rents regardless of what it's made out of. By renovating the vacants (say another $100k including needed park fixes), I am confident I can get the rent roll to $10-12k with $415k out of pocket. At $150k, I can bring in 10 'new' trailers that would be probably preferred to 'polishing a turd' as my father would say. That puts me at $465k stabilized with $10k rents, which at the bottom of my spreadsheet works out to $6500/mo before financing, or about a 17-cap. Also hits 2.2% gross cash flow, which is the first time I've seen 2% plus on something over $50k around here.

    Happy to update with missing details, please do not flame with anti-POH rhetoric, etc. I know this is not a cookie-cutter deal, it's just really high vacancy for a correctable reason.

     In the quality of park you are writing about Frank & Dave are experts. I've heard good comments about Jefferson. That should tell you something.

    Personally, I like high vacancy parks when I've done the market research to know that I can fill them. But, I have a related and fully licensed and compliant finance company and the sales personnel to make the possible a reality.

    Here is something to consider when others are outbidding you. In 1998, my partners and I sold a 1000 site park (96% occupancy) for $38.9 million. The guy who bought it outbid eight other bidders after a protracted bidding war. He was forced into bankruptcy in 2011 and the park was sold by the receivers for $14 million at 31% occupancy because of the rent raises he was forced to implement. All of the "losers" in the bidding war are still in business.

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  • Elihu Bogan
    OP
    Santa Barbara, CA · Member since 2015 · 20 posts · 3 votes
    10y

    @Ken Rishel good point about the bidding war - I've heard horror stories about what happened at the end of the MH financing book in the late-90s, early-00s. I definitely wouldn't raise my offer from where it is - I even asked the broker if I could flip the contract somehow for the $35k spread, but they didn't seem too keen on the idea :)

    1Reply
  • Jeffrey H.
    Houston, TX · Member since 2015 · 512 posts · 338 votes
    10y

    What shape is the infrastructure and are there any big ticket items?  Usually a Park like this will have lots of deferred tree trimming, road issues, water leaks, and a need to pump all the septic tanks.

    I'm not really sure which state this Jacksonville is in, but make sure that your state laws are landlord friendly.  In Florida for example, MHP tenants (when > 50% are Tenant Owned) can vote that a rent increase is excessive and take action to keep them lower.

    Looks like you've got your bases covered for the most part.

    0Reply
  • Curtis YoderPro Member
    Rental Property Investor · Tulsa, OK · Member since 2014 · 241 posts · 187 votes
    10y

    I would take a look and separate your facts from your unknowns. Make a list of the unknowns and begin estimating the worst case for them, then best case. You have to come to an educated guess at what you are in for. If you show cash flow with the worst case and you can absorb getting there then you have your answer.

    Maximize your income immediately. For instance, once your deal is closed you know you can buy a 20K mobile home, park it, and rent it for $X. Add value where you can,  easier to roll in a new trailer than putting 15 or 20K into one. You kind of did this but I would put on a spreadsheet, you may have already done so. The pump outs (inspections) of will give you a big check one way or the other as to the status of the septics. They are a simple gravity system and not that expensive in the whole scheme of things investing. Good luck to you!

    1Reply
  • Elihu Bogan
    OP
    Santa Barbara, CA · Member since 2015 · 20 posts · 3 votes
    10y

    @Jeffrey H. - Finally have a complete list as I go into closing. I pumped the tanks, looks like about about $20-25k in septic updates recommended, $5k to fix entrance asphalt, $2-3k for dead trees. No water leaks that I've found yet, and I'm hoping to put off some of the tree work until the winter when pricing (supposedly) drops significantly. It's in Jax, Florida, and currently 95% park-owned homes, so no union-busting worries yet.

    @Curtis Yoder That's pretty much what I did. I added a whole worksheet for capex scenarios and then plugged them into the main model. Worst-case scenario came in at about $250k in repairs on a $315k property, which broke even on cash flow and was a 6-cap or so. Still better than the 4-5caps I see where I live :)

    As a general update, closing Monday, have already lined up landscaping, dumpsters, trailer scrappers, and a handyman/"contractor" to rehab the few that are worth saving. Biggest problem I have now is locating replacement trailers for a reasonable cost (I'm hoping to keep total cost to $10k each or less installed). Also trying to decide how much of the septic work is must-do / should-do / or could-do. Hoping to rent 2-4 new units per month til the end of the year. Refi (equity cash-out) in 12mos once I have a prettier picture to sell to the bank.

    1Reply
  • Account Closed
    Investor · Bushnell, FL · Member since 2016 · 456 posts · 224 votes
    10y

    Hello, 

    I just wanted to add and I'm sure you know this already but it's worth saying. Don't forget about wind zone here in Florida when looking for used units. I made that mistake about 5 years ago, I wasn't buying a bunch, just one for a piece of land I bought at auction in Satsuma. The land had almost 2 acres and a very large burnt mobile on it. I only paid 4K for it and had to fight with the city to waive the back fines but after a few months and quite a few phone calls I got the whole 15k in back fines waived. I did have to tear down the mobile and decided to save money I would do it myself. Big, Big mistake .. It cost me about double to hire helpers and rent 2 40yd dumpsters and a excavator then a bobcat plus my time. I would have been much better off hiring a demo crew, lesson learned. After dealing with a pain in the *** inspector for demo permit, it was time to move another mobile on there. So I found one very reasonably priced just above Jacksonville over the border in Ga. I asked seller if it was wind zone 3 that I needed and he assured me it was because it came from a  Florida used mobile dealer,  and after he bought it his planes changed, so he needed to sell it. Once I got it here I found out that 1st, I had to have a state certified installer to set it up, gone is the days of doing it yourself.  2nd, even though the anchors in the concrete pads would line up with the new home,  I would have been forced to install new ones because of patented anchor system. And 3rd, once the title showed up from the used mobile dealer, it turned out that the wind zone on the home was only a 2. That home sat on the property not installed for almost a year till I could find a buyer in Ga in wind zone 2. Luckily I made most of my money back. I pretty much gave up on the land by then and sold it for $18,500 to the next door neighbor who lost at the auction because they only bid $3800 at the time. Sorry this is so long, I just really wanted to remind you about wind zones and some unseen expenses. But it sounds like you have things well under hand. Good luck, God Bless and God Speed.  

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  • Jeffrey H.
    Houston, TX · Member since 2015 · 512 posts · 338 votes
    10y

    @Elihu Bogan Is your goal to keep this Park with the POH or to convert it to Tenant Owned?  I'm only asking because this is a pretty big time investment, and can have extra difficulty and patience required if you're across the country.  Get your gameplan together, and find very good help and management, and it can be done - plan to double the timeline for whatever dates you set.  ;-)

    0Reply
  • Nathan W.
    Alexandria, VA · Member since 2014 · 140 posts · 45 votes
    10y

    I don't have much to add except that it seems like you have a good handle on the financials and due diligence.  You also seem to be on top of all the work that needs to be performed, having all your trades and help lined up before you close.  These are the types of things that I think will lead to success, regardless of the actual deal at hand.  I wish you the best of luck and I hope you stop back in at some point and let us know how it is working out for you.

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