first deal/mobile home park?

30 Replies

HI all, 

just getting started, looking for first deal. I found a MHP locally FSBO, it is 34 units over 7 acres, city water, with septic tanks which owner claims to empty yearly. asking $800k, brings in $91k/year, according to owner. water and gas, electric and cable individual metered to each pad. Mom and Pop owner, approx 80 yo, looking to retire. he does maintenance himself of roads, lawn care. I am meeting with the owner this sat. to discuss further. the property is on a main road that is growing with senior living and commercial properties between 2 larger towns. Vacant 7 acre lot down the road approx 1/2 mile just sold for $1,000,000 for a car dealership, which is under construction.

what questions should I be asking to further evaluate this deal? 

thanks for your input!  

Are there any other MHPs nearby?  What are their lot rents?  What percent of this MHP is occupied?

It's overpriced by easily 170K.

Are they all tenant owned homes. 

How many units are owned by park?  What maintenance equipment is included?  Owner financed?...or non-recourse financing?  Can rent be raised over time without getting near $500/mo?  Have you studied the prospectus?

ok so here is more information from a meeting I had with owner yesterday:

Park is in really good condition, roads are good, except their is right of way to another park behind this one. Turns out they share the maintenance of this road, he has patched his section as needed over the last few years. His property, approx 7 acres is subdivided in to smaller lots.  EVERYTHING is individually metered, gas, water, electric, and he has cable run to each pad. He has septic tanks that average 4 pads per septic tank, they are probably 40 years old and he pumps one half of them on alternate years. Obviously this is concerning, and he flat out said he would not allow a “dye” test on the system because he said that test puts to much pressure on the system and could cause a leak. I like that the septic units are smaller units that could be replaced PRN as they break down. He also said their are plans for septic to come to that area in the next few years when the main road adds turning lanes for the commercial growth, but who knows how long that would be. He also mentioned they intend to put a traffic light at his crossroads with the main road.

He compared his 800k property price to the car dealership land that sold for $1,000,050, but I would be concerned over the right of way right down the middle of his properties for potentially selling. He is adamant with the 800k price and asked him several times throughout our conversation about dropping the price, best you can do etc. but that was a "no go."  His other potential buyers have not come up with the cash, and the owner behind him has debt service on his property so he cannot buy it, because he doesn’t have the money. I asked about owner financing, but he shot that down because he is afraid he may get the property back at some point if the new owner fails. His motivation is plainly to retire and get in his RV and start traveling and spending more time with family. His kids don’t want the park, probably just the money, lol. Seems like a classic mom/pop story trying to to retire.

The property has 33 units plus an effeciency apartment that used to be the laundry mat. 28 units are rented, there are no property owned trailers. He allows 2 people per trailer and one cat, no dogs. He won’t let more that 2 people per trailer citing it would back up the septic. Probably 90% trailers are less than 30 years old, he won't allow any all metal trailers anymore. Each pad rents for $220, and the apartment for $350. He feels the pricing could go up, I haven’t had a chance to call around for what others are charging, but I would I’m guessing they could come up to $250 pretty easily. Expenses are as follows taxes: 1378, insurance 613, misc for electric light poles, salt for road, etc 988. 

here are some additional calculations:

800000 price

160k down

25 year, 5% commercial loan

NOI 28 units x 220 = 6510 + 350 (for apartment)= 6510 monthly cashflow

6510 x 12 =78120 gross income year

78120 - 2979 (expenses) per him = 75141 (NOI)

Monthly P&I = 3741 (based on 25 year, 5% interest rate) just a guess, not sure of current rates

3741 x 12= 44892 annual debt service

NOI/annual debt service = 75141/44892 = 1.67

Let me know your thoughts!

@Dave Homyak , @Thomas S. , @Greggory Lewis

yes there are other MHP, I called about 10 and 3 got back to me so far, one sits a more affluent area, but I surprised to hear $510 a month including utilities, another was $350. both of these sit in slightly more affluent ares but only 20 minutes from for sale park.  so I think raising the park lot rent to $250 is very doable.  28 lots are occupied out of 33 pads, all are owned.

we did not discuss maintenance equipment, but I already hav stuff for what would be needed, Kubota tractor with snow plow. he has refused owner finance, to this point, citing he doesn't want to be stuck with the park if the buyer fails, he is 80yo.

@John Bucknum , this is not my area of investing, but have you verified rent rolls to make sure everyone is paying?  The deal looks pretty good to me.  You might check the local assessor site to see what the land is appraised for by them.  It might also be worth your time to hire an appraiser, even if it is just for a quick valuation.  If prices are going up and it cash flows well this could be a good deal.  Good luck either way.

@Jerry W.

have not reviewed rent rolls yet, still learning the ropes, not always sure of sequencing of steps, but the owner is very upfront and I think he would be willing to do so. great idea with the assessor, I am going to do that this week. I thought about the appraiser, and have a friend who does residential appraisals, I'll reach out to him for a commercial appraiser, however, hard to get MHP appraisers from my understanding. thanks for the input!

@John Bucknum there seems to be a lot of concern for the septic system by the current owner. If I were a betting man, I would say that he is trying to get out before they need to be replaced. I would price out replacing the entire system and then see if this is still a good deal. On another note.... less than $3k maintenance per year seems very low to me.
(267) 520-0454

Go back and listen to Podcast Show 262. Jefferson Lilly is an expert in investing in MHPs and one of the key things he says is to stay away from Septic as much as possible. It will EAT your returns in the long run. Septic is not cheap to build out or maintain. If you must have this park, then be sure to negotiate it very very well and, as they say, 'hope for the best but plan for the worst.'

@John Bucknum $2,979 in expenses????  That might be missing a zero or is monthly not yearly.  The taxes alone should be more than that not to mention management, advertising, property care, cap ex, legal fees, accounting fees, etc.....

You better take a MUCH deeper look at the expenses

I recently evaluated a few RV parks in West Texas and put together this due diligence guide that could be helpful as you think about all of the bogeys in respect to the MHP.

I agree with the feedback regarding septic.  BIG RED FLAG if the owner will not allow an inspection. IMHO.

List of inspections/due diligence:

  • Septic 
  • Survey & Zoning specifications
  • Environmental Assessment
  • Electrical up to Code

Questions

The water supply:

  • Does the facility have a regulated off site water source? If so, who is the supplier?
  • Has there every been a problem with water supply to the facility?
  • Does the property have its own water source?

Fuel:

  • Any on site fuel tanks?
  • Any on site fuel tanks buried or above ground?
  • Does the facility currently or has the property ever sold fuel?

Environmental Assessment:

  • Have any hazardous materials ever contaminated the property?
  • Any previous use of the property involve chemicals, acid or poisons?
  • Has the property every been used as a garbage dump?

Land Use Laws

  • Have any land use laws changed that prohibit expansion?
  • Is the zoning different for the undeveloped land?
  • Is the property zoned to build more?

Agree that you need to look at expenses more closely. It is great that the utilities are already billed back to the tenants, but a typical expense ratio will run 30-40% of gross revenue.

@John Bucknum I agree with everyone else about expenses. Way to low: a 3.8% expense ratio is a joke. 

Assuming a still generous 30% expense ratio, the NOI to around $55k. That means at best you're getting this park at a 6.8 Cap at asking price, if a bank will underwrite that.

@Ryan Cox gave a great  list of DD items, which if you want bank financing will need to happen. To add to he pointed out, what are the set backs and will newer/larger homes fit on the existing lots. 

Do you have a bank that you know will give a loan on the property? Even if you can find financing you will need  significant cash reserves to see you through the first few years until the park can build up a nest egg. Probably on the order of at least $50k; it all depends on what condition the septic is in. Also, when was the park built because you may have issues with your water pipes.

Originally posted by @Jason DiClemente :
@John Bucknum there seems to be a lot of concern for the septic system by the current owner. If I were a betting man, I would say that he is trying to get out before they need to be replaced. I would price out replacing the entire system and then see if this is still a good deal. On another note.... less than $3k maintenance per year seems very low to me.

The other thing to price is what hooking up to the public system would be.  It may be cheaper, depending on if service has been brought closer to the park than when it was built.

@John Bucknum If he can provide the folder with all of the information on the park, that would help. Also, ask to see copies of any work done to the infrastructure. Though he's done some work in the park, it's kind of hard to do everything. Especially if it's a skilled job that requires a license (i.e. plumbing, electric, etc). Contractors who have worked in the park will help to see what you need to do in terms of deferred maintenance. Good luck!  

@Jason DiClemente @Larry Hawkins @Paul Bowers @Bill F.@Bill S. - absolutely agreed with in re: to septic evaluation, it admits they are old, however he has not allowed more than 8 persons on a septic tank, 4 homes x 2 a home. I would not move forward with this without an inspection, so next time I speak with him, I will bring this up and it may be a deal breaker if he doesn't allow a certified inspection. as far as expenses, I spoke with him yesterday morning an turns out he was off by 1300 a year. unfortunately his wife does the accounting and has supplied him with a crib sheet, so he doesn't have much explanation of the costs. obviously, I will need to sit down with her and review these with her, hopefully she has done a good job with the accounting records. 

@Ryan Cox - love the DD worksheet, very helpful, I have downloaded some others, but yours is more comprehensive. one good thing is he doesn't allow any tanks of any nature, he built this park from the ground up, a few trailers at a time, buying farmland off his father a few acres at a time, so he knows whats there.

@Rachel H.-thanks, my understanding is he has an electrician living in the park who has done his work. I certainly would have to inspect everything if we move forward

Additionally, I would definitely want an environmental inspection so nothing creeps up from that could cost big time and have me in trouble with the EPA, I heard that is a living [email protected]#$.

thanks again for the feedback!

@John Bucknum , you're going to want to see bank statements.  There is still no way that $4,300 per year covers expenses.  Heck, you'll spend near that on snow removal and lawn maintenance alone.

@Paul Bowers

Hi Paul, the tenants are responsible for there own lawn care, and the owner does snow removal himself. The park is 15 minutes from my home and i have the equipment. At least initially, i would do this myself. 

YES, im goong to want to see everytihng!

I am meeting with a bank tomorrow to discuss financing, I am really interested to see what he has to say, he is looking at the property today.

Thanks!

@John Bucknum Something feels off about this deal, but I also could have forgotten to take off my tin foil hat last night... 

The Expenses: Its a 5.5% expense ratio now. Either the expenses are correct and that's what he has been spending, which means you'll need to figure out the value of work he has been adding to the place unpaid and what what deferred maintenance exists and add those to your costs. The other alternative is that he has 'forgotten" some of his expense or put them off now that he is selling. The solution is simple: ask for his tax returns and bank statements for the last three-five years average them out and add in his management and labor costs. Folks can get forgetful when they go to sell, they tend have a lot better memory when dealing with the IRS.

The Septic Tank: Its great that he hasn't allowed lots of people into the homes over the years, but that's not where your risk lies. If they had 10 people per unit you could pump all the tanks and start from a clean slate. What you care about is clogs, crushed pipes, if the leach field doesn't perc any more... Basically things that will cause you to replace a system. While there is some overlap between system use and longevity, its not the whole story. Also, last time I checked dye tests did not involve pressurizing the system. Plus you want to have all the lines scoped with a camera.

The price: It isn't unusual to see in any industry long time owners overvaluing their business. If you want to get the price down into reality, you'll have to show him what his business and land are worth and why. It sounds like he saw the property down the street sell, he knocked off 20% for whatever reason, and that's his number. It will take some convincing and relationship building to get him into the realm of reality, if everything else checks out.

The devil's in the septic system. I would never buy that property as a trailer park. If the place down the road sold for a million, maybe it would be a good buy as a parking lot. The whole scenario just smells bad to me! (really bad pun intended)

@John Bucknum as a reformed Civil Engineer with some background in sewer and septic systems I would offer this. It's not a mater of if the septic systems fail, it's when. At 40 years, they are well beyond a septic system design life of 20 years. His pumping them every other year, probably means they already have failed and he is just managing them in a way that hides that. 

The first order of business is to figure out if they can be replaced if they have to be replaced. Code changes and septic systems are animals going the way of the dodo bird. Some areas pretty much prohibit installing new ones. Others have such outlandish requirements (mound systems) that it is not economical to construct them for something like a trailer park. Call the state department of environmental quality (or who ever regulates commercial septic systems in your state) and see what they say.

@Bill S.

thanks, I think I am going to try and get the owner under contract first. I am guessing that we are still too far away on the numbers, plus I need to see more concrete accounting of expenses.  spoke with the local code officer and the plans for city septic are about 3-5 years away.

@Bill S. seems like you address why some people (Jefferson Lilly) doesn't do septic. I remember hearing him constantly say it, but can't seem to recall why. These reasons seems pretty good, if you aren't even allow to replace it, you're going to be in a pretty crap situation. This also may be the case as he doesn't want to end up with the property if the next owner fails.

Old man is looking for a young fool. This park MIGHT be worth 500k.

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