Mobile Home Park Purchase

12 Replies

Hi All. I am entering into a contract for a Mobile Home Park (MHP) soon. The seller and I have already agreed on a price and I have received the contract. Before I move to the next step I have been reading a book from owners of Mobile Home University that says they only value the income from the pads only in calculating the value of the park, and not the rent from the units the park owns on those land. The park I am looking has just about 100 lots and of which 40 lots have park owned homes. While I understand their concerns, I want to know if anyone else share their point of view.

Does anyone have any experience with this type of a situation?

Any guidance would be appreciated.

RJ

Hi RJ,

We own several MHP's in GA. Though we counted the rents from homes as part of the NOI, my understanding is that lenders will only count the income from the land when and if you go to get financing. They see the homes as literally a depreciating asset (as you know it gets taxed under the DMV in most states). We got owner financing so for now we don't have an issue. When our note is up in 10 years (or 15 if we go with the option) we'll cross that bridge.

Hope that helps a little bit.

That does help James. Thanks.

How do you find the park owned homes perform? Do they have a high expense ratio per your experience? I am marking them at 50% expense ratio and the pads at 40%. Does that sound about right?

I believe pads should be around 35% and POH's between 55-60% depending on age and how well you screen your tenants.  Do you have public water and sewer, well and septic or a combo of the two?  Water leaks can be very expensive so you have to monitor readings and investigate any fluctuations.  

there is a podcast on the subject.  If I recall correctly homes are evaluated on an individual basis per their sales value and not the rental income.  The lot rent was the only number used to generate the value of the park and then the home are added.  So 100 lots at 200 would be $200,000 plus the 40 homes at say $10k each.  The argument is that you will overpay for a $10k MH if you value it like the land.  For example if it rents at $300 a month and you apply a 10% cap you will pay $36k for a $10k home.

Podcast 111.  biggerpockets.com/show111

Applying a 10 cap to park owned home rent is a great way to get yourself in a bind and drastically changes the value of a park, especially with that many POHs. As was mentioned they are depreciating assets and, in any case, the best case scenario is you selling them to their residents and offloading that income. Even if they cash flow the expense ratio is going to be substantially higher, as is the headache factor. Just buy on lot rent and pay what the homes are worth on the open market. Some homes are literally worth a negative number. Soon after I closed on my park I had a tenant abandon the worst junker there, I inherited my only (thankfully) POH. It's not worth rehabbing, in fact, it will cost me money to remove. If someone applied a cap rate to its rental income (especially for multiple cases) they'd be in a world of hurt. Applying a cap to MH income feels like a way to try to force the numbers to work correctly when they don't.  I'd think long and hard before discarding anything you learn from MHU but in this case especially it's one of the cardinal sins and leading causes for getting upside down in a deal.

Thank you all.

James, the park has public water and septic tank for sewer. The seller charges back the water to the tenants and charges a flat fee for sewer.

Tim/George, I have valued the park by dividing its three streams of income.

1. Pad rent only for the whole park, at a 9-10% Cap Rate as the area I am look at on the East Coast has others that have sold for between 8.5-9% Cap. This takes into account a 45% expense ratio.

2. Valuing the POHs, based on their gross income, less pad rent income, and a 50% expense ratio. Having realized these homes are higher risk, and will require more maintenance. Then charging 10% Cap to them. I plan on valuing the homes correctly during the due diligence process to actually determine their value and then going back to the negotiation table with the seller. My current numbers show I am paying an average of $13,000 per home.

3. The Rent to Owns that the seller has, have been discounted back to their PV based on the streams of the future incomes they would generate.

One of things I am thinking about doing post purchase is, starting to charge a maintenance fee of $50 per POH. This will allow me to have a separate budget to maintain the homes rather then relying on the tenants to inform me. The cash flows over the last 3 years show that 90 of tenants have been staying in the POH and have been paying on time.

Has anyone had good experiences with POH on the east coast?

@Rohit Jindal  

Is this your first park? I would walk on Septic alone.

The park owned homes have close to no value. This is often an issue when you work with sellers. That's my .02 anyway. Some people like to think the damn things are worth something on their own.

I am also trying to page @Jefferson Lily but the mention button won't work for him.

@Ariel O. It is my first park but want to understand why not deal with Septic? I have heard public utilities is the best case scenario but not all parks will have that.

Septic tanks have maintenance and one day the city may require the park to be converted to sewer.  Have you listened to Podcast 111 yet?  Jefferson talks about utilities.

@Rohit Jindal

Sorry for the delay.

There are two risks you need to mitigate when buying specifically Septic.

The first risk is just basic lifetime of the system etc, what your costs might be, that sort of thing.

The second risk, and to my mind the more complicated one is the environmental risk. Is the system ok now? What different outcomes might result from various regulatory decisions? Might I be required to upgrade my system against my will because of EPA requirements now or in the future? 

I don't think it's necessarily a bad thing, I just think for the first park and to protect your cash you're better of not.

I can tell you that both as an investor and from a PMGuardian point of view, I Talk to a lot of mobile home park owners. The two uniform things people complain about are park owned homes and septic/well.

Rohit -

I'm sensing you are about to make a big mistake.  The MHP business is very complex.  My BP Podcast will help you get an appreciation for that, but there is much more to it than that.  You should not buy a park without first going to Bootcamp.  You are asking a lot of beginner questions, which is good, but there is just way to much to go wrong in your diligence process if you don't know what to look for.  Go to Bootcamp, get the '30 Days of Diligence' book.  Then you'll be 'armed and dangerous' and ready to buy your first park.

Good luck,

-jl- 

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