Buying a mobile home park with mostly park owned homes

[Gulliver R.]

This might be a silly question: but when buying a MHP with mostly park owned homes are the park owned homes usually included in the price of the MHP? If so, then I can pretty much begin the process of rent-to-own contracts, right?

[Edward B.]

@Gulliver R., they should be, but read your contract carefully and make sure they are. I have read that it is best to have separate contracts for the MHs and for the land. And make sure that the homes are actually owned by the park and have not been seller financed. I have seen pro formas that included payments on seller financed homes as rent. Big no no.

[Gulliver R.]

Thanks for that Edward B. ! That seems like it could sneak up on you if you didn't triple check. Is that something I can put in my purchase agreement as a contingency? Like be able to back out and get my earnest money if it turns out that the homes are NOT park owned but instead are being seller financed to the current tenants?

[Edward B.]

@Gulliver R., you can put anything in your purchase agreement as a contingency. Typically with something of this scale you would have a due diligence period where you could review their actual income/expenses, balance sheet, cash flow etc. and inspect the property in detail. During that period you could walk for any reason if something popped up and you couldn't come to agreement with the seller. I am honestly not that smart on MHP although they do intrigue me so I have looked into them from time to time. I would say get smart before you move on something like this, or find someone who is smart and pay them to help make sure you don't get hammered. MH are kind of a weird beast, but there is good money to be made by those willing to tame it.

[Mark Gruetzmacher]

I have never bought a park but I was looking about a year ago and at that time this is what I was told.  I would imagine a lot of other knowledgeable people will chime in.

The park should have it's own value and the homes just get added in to the price of the park. The value of the actual park is from the NOI of the lot rents coming in from the rented spaces. So if it is say 50 spaces, rented at $200 each space and it is 100% occupied you would get $10K per month gross, minus out your expenses and let's say your net is $8K per month net. So then $8K x 12 month = $96k per year. Divide that by your CAP rate let's say 10%, so $96K / .10 = $960K value for the park. Then add in the value of each park owned home. I believe that is the correct way but like I said I am not too sure as that was the info I remember. Maybe @John Fedro can answer that question.

[Aaron Mazzrillo]

Also make sure you are not buying based on a cap rate applied to the rental income of the POHs. If you do, once you unwind the numbers, you'll realized you just paid $50,000 for junky single wide homes. The cap should be based on what the sites will rent for to owner occupied homes and the homes based on what similar junk could be bought for in your market. 

Edit: Just read the post above mine and I guess he pretty much covered this.

[Curt Smith]

HI, I strongly suggest you buy Frank and Dave/s MHP 30 day DD kit at mobilehomeuniversity dot com it includes a purchase contract.  50 pages LOL.  Yes there's that much to consider.

The worst thing new buyers do is take the price of a park with mostly park owned homes as if that is fair value.  Its usually not.  In the 30 day DD kit and made very clear in the 3 day boot camp is the value of a park, the same tactic a bank's park appraisor takes is:

- consider only lot rent, or lot rent equivalent.  What is the going lot rent in the area?  any lot renters in the park?

- Figure 30% expense ratio

- park value = lots x $lot rent x 12 x 0.3 (expense ratio) = NOI

A well run clean park in a very good location next to jobs.  Many buyers forget they are buying a tenant pool with jobs when they buy a MF or MHP.  A multi door deal must have a large pool of tenants with good jobs.  This is DD step #1.  A park in very small town or no obvious source of good jobs, walk, no-deal!

Good smaller parks trade at 10% cap rate.  Rougher parks 11 to 12% or higher cap rate.

So NOI / 0.1 = price of the park.

This probably is MUCH less than the sellers ask. We've bought one park, offered on many others, been through boot camps, talk to MHP appraisors,,, the above forumula is what a bank will use to determine a parks value so you should too. If you get into contract at a higher price and plan on bank financing,,, someones going to take a hair cut. This is the good news path. If the owner offers seller financing at an unreasonable price, the REFI math at 70% LTV best you can get for commercial deals, with no experience 1st time buyer, math shows you CANT REFI out without adding an impossible amount of NOI increases in a time frame that isn't possible. Seller financing can be a trap. A 10 yr balloon vs 5 or 7, is a help, plus the park having lots of value add opps...

Notice the above tosses out the home rent above the lot rent.  Totall tosses it out!!   Too much to explain here, but park owned homes due to turn over, damage, stolen appliances, wrecked ACs etc you bairly make a nickle on the home rent.  The money in a park is the lot rent, owners know this, banks know this but few small park owners know this and brokers appease the sellers by cap rating the home rent making for crazy prices.

Ive posted how the big parks are doing rent to own to avoid running into problems with your states banking division in other BP mobile home threads.  Search on rent to own in the mobile home forum.

Offering a DD tip:  your purchase contract (get the one mentioned above) must state all MH titles must be delivered at closing.  A $3k per home escrow must be set up per MH with no title at the time of closing to ensure the state and county paper work is completed to deliver MH titles for all homes.

Its guarranteed that your seller may not have all home titles.  Just happens, there's fixes but it costs time and money.  IE the state / counties MH abandonment process.

[Rich Ferradino]

@Curt Smith Wouldn't  your 30% expense ratio be calculated as x 0.7 on your park value formula versus x .3?  I like your DD tip on MH titles. In the commercial RE contract if just says convey title which could be interpreted in different meanings depending on what side of the sale you are on. 

[Curt Smith]

@Rich Ferradino OMG tnx yes.  0.7.

FWIW if one is dead set at calculating the value of a park with park owned then:

NOI = lots x $ave home rent x 0.4 (60% expense ratio) = NOI

Value = NOI/0.1 (parked owned home parks are much more effort to manage so should trade at 11 or 12 cap, but this is a tough sell).

Then Value = value from above + $nominal value of all homes, use $3k x homes

Find value of the typical home in the park from craigslist etc.  Older single wides have a nominal value $3k to $5k max.  The price of the park should be the same +/-

[Gulliver R.]

Curt Smith so basically after I calculate the value of the land can you explain again how to find out the value of the park owned homes?

Would I be buying the homes separately?

I would prefer a park that has mostly tenant owned homes.

Also as a potential buyer of a park what do I do about park owned homes that have been put on rent-to-own or lease option contracts?

[Curt Smith]

Parked owned homes are valued "nominally" which is a guess.  Use craigslist to find same aged homes but you need the trading price not asking which for MHs can be 1/5th the ask.  IE ask $10 sell for 2k.  Yes that much discount.

No you are buying the WHOLE business. Folks buying SFR think buying a strip mall, appartment building, mobile home park is a buying the components task. No you are buying a functioning (maybe) business. You value the business. Which explains why commercial businesses trade on the basis of their NOI and little else, NOI and a market based cap rate.

The homes are bought at the same time as the park, personal property of lawn mowers, sheds, tools, office equipment etc, the whole works.   All mobile home titles must be xfered at closing OR you need to put in your purchase contract an escrow amount per missing title to encourage the current owner to go through the tedious and sometimes expensive steps at the county to get a new title.  The county expense for you via an abandoned MH process would be MUCH more expensive and more tedious.

You contract must state all MH titles are valid and will be signed over...  This is but one example of why you need to take a MHP buying boot camp and come away with their purchasee contract.

[Vincent Chen]

@Curt Smith As far as your description,the valuation methodology is similar as apartment building (NOI/Cap Rate).

But I think MHP different from apartment building is the exit strategies and finance part,can you explain more on these topics?

Thank you

[Curt Smith]

Its the bank appraisers that set value, one just needs to get educated in MHPs and go through a deal.  Frank and Dave have a great boot camp.  mobilehomeuniversity dot com

Value is based on equivilant lot rent ignoring the rent from the homes. IE $650 total rent. And prevailing lot rent is $250/lot then use the above formula for valuation based on lot rent (use 30% expense ratio). Those who have run a park owned home park in D class areas know that expenses are very high. Only areas up North (WI, MN, MI etc) where folks actually pay their rent and don't steal things actually have low expense ratio for park owned homes. Any typical location park owned homes run 60% expenses (40% of gross rent makes it to NOI).

[Zach Woods]

Quote from @Curt Smith:

HI, I strongly suggest you buy Frank and Dave/s MHP 30 day DD kit at mobilehomeuniversity dot com it includes a purchase contract.  50 pages LOL.  Yes there's that much to consider.

The worst thing new buyers do is take the price of a park with mostly park owned homes as if that is fair value.  Its usually not.  In the 30 day DD kit and made very clear in the 3 day boot camp is the value of a park, the same tactic a bank's park appraisor takes is:

- consider only lot rent, or lot rent equivalent.  What is the going lot rent in the area?  any lot renters in the park?

- Figure 30% expense ratio

- park value = lots x $lot rent x 12 x 0.3 (expense ratio) = NOI

A well run clean park in a very good location next to jobs.  Many buyers forget they are buying a tenant pool with jobs when they buy a MF or MHP.  A multi door deal must have a large pool of tenants with good jobs.  This is DD step #1.  A park in very small town or no obvious source of good jobs, walk, no-deal!

Good smaller parks trade at 10% cap rate.  Rougher parks 11 to 12% or higher cap rate.

So NOI / 0.1 = price of the park.

This probably is MUCH less than the sellers ask. We've bought one park, offered on many others, been through boot camps, talk to MHP appraisors,,, the above forumula is what a bank will use to determine a parks value so you should too. If you get into contract at a higher price and plan on bank financing,,, someones going to take a hair cut. This is the good news path. If the owner offers seller financing at an unreasonable price, the REFI math at 70% LTV best you can get for commercial deals, with no experience 1st time buyer, math shows you CANT REFI out without adding an impossible amount of NOI increases in a time frame that isn't possible. Seller financing can be a trap. A 10 yr balloon vs 5 or 7, is a help, plus the park having lots of value add opps...

Notice the above tosses out the home rent above the lot rent.  Totall tosses it out!!   Too much to explain here, but park owned homes due to turn over, damage, stolen appliances, wrecked ACs etc you bairly make a nickle on the home rent.  The money in a park is the lot rent, owners know this, banks know this but few small park owners know this and brokers appease the sellers by cap rating the home rent making for crazy prices.

Ive posted how the big parks are doing rent to own to avoid running into problems with your states banking division in other BP mobile home threads.  Search on rent to own in the mobile home forum.

Offering a DD tip:  your purchase contract (get the one mentioned above) must state all MH titles must be delivered at closing.  A $3k per home escrow must be set up per MH with no title at the time of closing to ensure the state and county paper work is completed to deliver MH titles for all homes.

Its guarranteed that your seller may not have all home titles.  Just happens, there's fixes but it costs time and money.  IE the state / counties MH abandonment process.

 This is brilliant information. Thank you.