21 Lot MHP Valuation

[Stryker Brown]

Hey guys! This is my first post on here but I have been analyzing deals consistently and learning for roughly the last year. I recently found an off-market deal in Southeast GA that I am currently in negotiations with and could potentially get a great deal.

The park is across the street from a brand new development where land sold for around $140k/acre which is an encouraging potential exit strategy. Currently it is only occupied on 8 pads (5 POH and 3 lot rent) and this has 13 vacant lots. Current lot rent is $325 but the market supports $350 pretty easily. The big plus is the the park is on city sewer and already sub-metered for water, I think. I know it will take some time and money to fill the vacancy (I estimate $130k conservatively and 12-18 months) but I wanted to see what you guys thought would be a good valuation.

Current valuation formula I’m using is 21 lots * $325/m*12*.6 (expenses) / .15 (I’m greedy and want a $15 cap. That would put the valuation at $350k - $100k in CapX needed to give me $250k for the purchase price I’m looking to get.

Other factors for potential exit is land sale as development continues ( the park is 5 acres). His concrete offer is $400k but I believe I have some leverage.

Am I looking at this right? What are some pitfalls to keep an eye out for? I’m going to pursue owner financing, so what terms should I request? Should I partner on a deal like this?

[Daniel Ryu]

@Stryker Brown

Ask him for a Rent Roll and P&L.

Ask him do these represent normal operations going forward?

Review his expenses - do they make sense? If the Expense factor is below 30%, likely there's something missing. For smaller parks the expense ratio usually are higher (40%+)

Review his income - was the monthly income stream consistent? Did they factor in collections loss or vacancy?

Based your offer price on his current NOI (with your adjustments) divided by the market cap rate.

During the due diligence period, if you get it under contract, you'll have to try and confirm as many of the P&L assumptions as you can. If you find evidence (ie utilities were way higher than stated), you let the seller know what you found and see what explanation he gives. If there are enough issues, then you'll likely have to ask for a retrade on price. 

RE Cap Ex: Ask yourself - if I put in a $100K in cap ex, what value will I get from that? it's like remodeling a kitchen before you sell a home. If it costs $50K to remodel and it only adds $40K of value, then likely you won't do it. If the cap ex exceeds the value created, then you'll need to get some of that cap ex discounted from the price.

Instead of valuing the empty lots, think about what the exit price will look like and if you're going to offer more than the current value, ask yourself how much of the value add am I willing to pay for upfront?

The empty lots or 'undermarket rents' - that represents your value add that you earn for doing the work to drive the NOI. In a competitive bidding situation, you might have to pay more to win the deal. Just keep in mind the more you pay, the lower your return. Know what your walk away number is.

Also keep in mind that buyers set pricing, not sellers. If no one's willing to pay his $400K price then eventually, he'll have to come off that number

(note: I've been involved in deals where the seller is valuing the park based on the 'redevelopment' potential and not as an MHP - if there's a developer that's willing to pay, then they'll outbid me every time)

While buyers set pricing, though, sellers set timing! It may be awhile before the sellers are willing to accept what the true market value is.

That's where it pays to continually follow up.