I'm currently evaluating a park with 65 pads with no vacancies, at a lot rent of $450 for a Gross Income of $351,000. The Seller is willing to finance the park with a low Down Payment, between 5-10%. The Seller is very proud of his low quoted expense ratio, and is using this as leverage to command a higher monthly payment based on his existing cash flows.
The park currently includes water/sewer/trash with rent. Below are the expenses which have been provided to us so far with some digging:
|Property Management Fee||$ 9,600|
|Accounting & Admin|
|Property Taxes (% PT)||$ 35,000|
|Licenses, Permits & Dues||$ 100|
|Offsite Management Fee|
The property tax figure I calculated is based on an assumed reassessment after the sale of the park. This comes out to an Expense Ratio of 35%, on the low end for a park which pays for water/sewer/trash. For the expense categories I have listed which are blank, the Seller has said his expenses are "negligible", and I can see it's going to be a real struggle to get his historic records on this. Assuming we will conduct thorough due diligence on the park infrastructure and utilities, I'm looking for guidance on the following:
1) Does anyone have experience in extracting this type of information from challenging Sellers? Since we're planning to Seller finance, I won't really be able to pull the "the bank would need to see this type of information" card in this case.
2) With submetering and billing back utilities (assuming a 15% bill back loss), we would be increasing the cash flow by $50k per year. At an 8 CAP, this would increase the value of the park by over $600k. While this is a strong improvement, I'm worried about further upside potential to the park. The current Owner has done very little in the way of capital improvements, and already has rents pretty close to the higher end of the market. Are there any suggestions on how to add relatively inexpensive value to a park after takeover? We will certainly fix up the entrance to the park, and I'm also considering adding security cameras.
3) As an older park, the lots are somewhat small and close together. I've verified that the park is grandfathered to be able to swap in new homes for the existing pads and not have to meet modern setback standards, so we could fit 65' - 70' homes on virtually all of the lots. Though the park has had minimal turnover I'd like to ensure we're in a good position to bring in new homes when needed. What's the best way to verify the lots meet minimal clearances needed to bring in new homes? Would a Dealer be able to tell me if certain areas of the park are too tight to be able to install a new 70' home?
Thanks all in advance for the helpful advice.
@Keith Meyer Congrats on getting a live on on the line!
1) This may sound dumb, but have you asked for 3-5 years of records or are you assuming he won't give them up. I don't see a reason you can't use the bank reason. Say you have private money, silent partner who wants to underwrite the deal for themselves. For the note does he want a higher rate or shorter term?
2) This doesn't have a lot of the traditional hallmarks of a value add deal. It may fall more into the core/ core plus area. Are the roads/driveways paved? Does it have street lights?
3) I'd get the park surveyed and then have a dealer/mover look at the tight spots and give their opinion. Maybe have two or three in the local area do it. Give them $200 and you can use it as a try out to see which you want to develop a relationship with.
It sounds like you need to have a frank conversation with the seller letting him know that you won't run the park the way he has and that if he can't provide as much info as he can, you'll be forced to make conservative assumptions, which may adversely impact the final price you are willing to pay.
@Bill F. Thank you for the feedback. To answer your questions with the current information I have available:
1) We are placing a formal request for this in our Purchase Agreement. I'm very curious to see what we get back. Good suggestion on the private money angle, I really want the Seller to understand we need to be able to do solid underwriting to get this deal done.
2) The park is in pretty rough aesthetic condition, the roads have not been reconditioned in many years and are ugly but there aren't any problematic potholes. As this is a park in a great location which is also a "high desert" climate, dusty roads are mostly accepted across town. According to the Seller there hasn't been a need for him to improve the aesthetic to attract new tenants. Even with effectively raising the rent $40-$60/month with the utilities bill back, I'm pretty confident the park will stay full in this area. I think the bill back makes up the majority of the value add opportunity, I'm just looking for other creative ideas to add value in a cost effective manner.
3) Good suggestion on the dealer/mover visit, I was thinking something along those same lines. I'm also going to need to get more granular with the City Zoning department in terms of what exactly is grandfathered. We'll be ordering an official Zone Cert to get as much in writing as we can.
The sewers are cast iron and the water lines are galvanized metal. Seller says both have been very low maintenance required for the past 30 years, only occasional leak repairs. I'm a little wary of the rust potential with cast iron, we will certainly have the sewer lines camera snaked early in the DD process. I'll also call around to the local plumbing repair companies to make sure their repair history matches up with his records.
I would Check to see if you can lower expenses or cut unnecessary expenses (cut cable, lower manager pay, fire some employees, etc). If the lot rents are already very high for that market, 100% occupied, and you're already planning on billing back the w/s, then that's the only thing I can think of to increase NOI.
To find out about setbacks, zoning, and bringing in homes you want to call the county or city building or mobile home park licensing office. Each county is different. For my park I know the guy who does all mobile home park licensing and zoning for my county so I just reach out to him.
For getting diligence documents I always ask for 2 years of bank statements, Schedule E tax statements, and a certified Rent Roll (may be Estippel Letters too).. this is so you can verify the income is real in the span of the last 2 years. This is pretty standard of a request in the industry. Some Ma and Pa sellers don’t have all the documentation but they should be able to give you something. You always want to have boots on the ground counting all the homes that are occupied/vacant so you can verify that they are really 100% occupied like he said they are (this helps you in believing him and his numbers).
@Keith Meyer Seems like you're one the right track. When you say High Desert, I'm picturing San Bernardino or maybe Riverside county? Having spent some time up there I can see why the owner has a lack of concern with beautification. Its a different world up there.
I'd have the same concerns with the sewer and water lines, but I think you may be pleasantly surprised. Nothing decays in that desert.
It looks like you have a have a good core plus asset with generous financing terms. Not a home run, but more than a base hit for sure. As long this isn't a Superfund site in waiting or a CapEx pit all you'll need to bring to the table is DD funds, Down Payment, and a modest capital reserve to tide you over for the first few years.
Is a broker involved in the deal or did you source it yourself? You may have to piece together P&L, Balance Sheet and other financial statements if there's no broker, but that's not a big deal.
You may want to check to see how competitive the Seller's terms are versus a bank. If you're getting a good deal there then sounds like you have a promising deal, assuming you value based on how you run it like @Bill F. mentioned.
Want to be sure you can absorb capital improvements such as the new road, once needed, and that your debt service doesn't eat all your profit.
Hope your due diligence goes well!
Well, those expenses aren't accurate, they are just guesses. I know this, because they all end in a zero. Can you name a month, let alone a year, when had water, electricity or other bills that all ended in a zeroes?
I would ask for bank statements or income tax records too. Sellers always overreport expenses to the IRS and underreport them to sellers. If not, just assume that his expenses are what the average is (or a little more) for other parks that size and in that area. The utility company isn't charging his less than everybody else.
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