All Forum Posts by: Dave Reynolds

Tod,

Most mobile home park lenders will require 20-30% down. If the park has a vacancy problem that may be up to 50%. Right now I am seeing the best loans from local banks that have done mobile home park loans in the past. Better rates and terms.

Here is a link to a guide on mobile home park financing that goes through MHP financing in much more detail. Also there is a link here from Wells Fargo discussing their programs as well.

http://www.mobilehomeparkstore.com/mobile-home-park-financing-loans.htm

Jon, you are welcome.

Tom,

Mobile Home Parks are different in that you are usually managing a manager rather than managing tenants. Many of the same types of economies of scale apply to MHP's as in Apartments. It is much easier to manage 100 mobile home park tenants than it is to manage 25 single family homes. One location versus 25.

I own parks in about 10 states and am managing just the managers. It would be very difficult to manage single family home rentals in 10 states, let alone make a profit on renting them out.

When buying a park I am typically looking at it only as a mobile home park. However, in many cases, the older parks are in terrific locations that make them worth more as some other type of development. In this case, if I can buy based on park value and then have an exit strategy in both park value and further development, this is a plus.

Valuing a Mobile Home Park:

I want to know how many lots there are, how many are occupied and paying, what the lot rent is, what expenses the owner is paying, and who is responsible for the water lines, sewer lines, and roads.

A good rule of thumb that I use to start with is that I take the number of occupied spaces and multiply this by the average monthly space rent and multiply this by 70.

For example if the park has 110 spaces with 10 vacancies, a monthly average space rent of $200.

Then my initial value calculation is 100 x $200 x 70 = $1,400,000.

If the park is on the market for $3 million I will probably pass. If the park is on the market for $1,800,000 or less than I will probably look into it further. Remember this simple calculation is very generic and may or may not be the true indication of the value of a mobile home park.

In looking at the park in more detail, I will ask for actual operating income as well as actual operating expenses.

The operating expense ratio can vary significantly from one park to another in the same city even if located adjacent to one another. One of the largest expenses in a park is the water and sewer expense. If the residents of the park are paying this expense then you can expect the operating expense ratio to be as much as 15% less than the average.

The value a mobile home park may be $2 million for one person and $1.5 million to someone else. The key is really deciding what you are willing to pay based on your expectations of what type of return you want on your investment. This return on investment will come in several different forms:

• Monthly/Yearly Cash Flow
• Tax Savings
• Equity Buildup
• Appreciation
• Rent Increases and Expense Reductions

In analyzing the financial statements and tax returns, they are often different. The financial statements usually have more income and less expenses and the tax returns usually have less income and more expenses.(however, I have seen in some cases that the tax returns are also overstated in order to show a better net income when it comes time to sell or refinance a park. If by paying taxes on an additional 20k in taxes for a couple of years increases the value of the park by 200k then a real sophisticated and dishonest seller may be trying to pull a fast one. So be careful.

The key then is to reconcile the tax return with the profit and loss statement and then interject reality into the whole process.

Figuring out the actual income is usually not too difficult. You can take the actual number of spaces in the park and multiply this by the actual rents being charged and subtract out a reasonable allowance for collections and you should be able to come up with a good estimate of the income. I usually use 3% as the collections expense.

The next thing to do is to come up with the anticipated expenses based not only on how the park is currently operating but also based on how the park will operate with you as the new owner. For example, if the current owner is managing the park, then you need to plug in an amount for management and payroll taxes and workers comp. If the park has vacancies and there is no advertising expense, then you need to plug in an amount for advertising. And so on.

Common expenses for Mobile Home Parks. Not every park has all of these expenses and some have additional expenses but this is a good starting point.

Advertising
Bank Service Charges
Depreciation
Insurance: Liability
Insurance: Property
Insurance: Workers Comp
Interest: Mortgage
Legal and Accounting
Licenses and Permits
Maintenance Labor
Management Offsite
Management Onsite
Mowing & Landscaping
Postage
Rent Discounts & Incentives
Repairs: Equipment
Repairs: Property
Reserve for Capital Improvements
Supplies: Maintenance
Supplies: Office
Taxes: Payroll
Taxes: Property
Telephone
Travel
Utilities: Electric
Utilities: Gas
Utilities: Trash
Utilities: Water & Sewer

In most cases when you review a sales package for a mobile home park for sale it will not mention any reserve for capital expenditures. This really should be addressed in your evaluation of the park and in the due diligence phase. Items like replacing all the water lines or sewer lines for older parks, resurfacing the roads, topping all the trees, are large expenses that can occur in the future and they should be budgeted for. While they are not expensed for income tax purposes they are capitalized and depreciated over 15 years or so, and are therefore real costs. I would include at least 2-3% of gross income as a Reserve for Capital Improvements in your numbers when determining the value.

You will find some sellers that expense everything and then find the opposite where owners capitalize as much as possible to make the bottom line look better. Spend some time going through all the expenses and estimating future capital improvements.

After coming up with the income that the park is currently generating and deducting from that all the anticipated operating expenses including the reserve for capital expenditures you will have what is called the Net Operating Income.

If you take the Net Operating Income and divide this by the price you come up with the Capitalization Rate (Cap Rate). Also, if you divide the Net Operating Income by the Cap Rate you come up with the price and so on.

Now this is where subjectivity comes into play. I remember not too many years ago you could buy 50 -100 unit mobile home parks valued in the 12 – 14% cap rate range. It is hard to find these deals anymore. Add into that the fact that the interest rates were so low for the last few years and the 12-14 caps are now 7-10 caps. The demand for good quality mobile home parks is and has been much greater than the supply. There are even stabilized parks that I have seen purchased for 5 & 6 percent caps. These were not just for redevelopment purposes either.

What is a good cap rate? The answer is really up to the buyer. Some buyers tell me they want at least a 7 cap, some say 10 cap, some say 15 cap(I say good luck to these people).

So in reality, a certain mobile home park will have a different value to each and every person. The idea is to decide what you want or will require in terms of your investment and then work to make the deal fit these requirements.

If you want a 10 cap on a property priced at a 7 cap, it does not necessarily mean you should pass on the deal. For instance, what if the park has rents that are $50 under market and through your inspections and due diligence you know you could raise the rent to market rates in 2 months. What if this would make it a 10 Cap? Another possibility would be to put it under contract and then in your due diligence you tell the seller that you want to move forward with the purchase but in order to do so and to satisfy your lenders requirements, obtain an adequate appraisal, and/or make the required return on your investment, you need to have him send a rent increase notice out right away so the rates are where you want them at closing.

In another example, suppose the park has an NOI of $80,000 and is priced at 1 million. Also, suppose that the park is currently paying for water and sewer and this expense is running approximately $30,000 per year. You know that you could install water meters and pass this expense on to the residents. You want a 10 cap on your purchase. You could very well purchase this park and realize the return you want very quickly in situations such as this. If the rents are under market or there are expenses that can be reduced or other ways to increase the net income with minimal work and cash outlay you might pay extra for a park if it otherwise meets your investment criteria.

As my general rule when dealing with parks that are borderline but have the potential to increase in value and offer an acceptable return on investment by raising rents or reducing expense: I generally will add up to 50% of the value from these quick fixes to my offer on a park. So if I can increase the rates to market and reduce expenses and this increases the value of the park by $100,000, then I would consider adding $50,000 to my offer price if necessary. After all, we should earn something from our expertise and doing what the owner could have done already.

Other considerations on the value of the park will be the entrances, streets, landscaping, utilities, parking, lights, storage sheds, number of singles versus doubles, swimming pools, clubhouses, etc. The nicer the park typically the lower the cap rate and the easier it will to tap into better financing programs.

Other Value Considerations:

Vacant Lots:

When purchasing a mobile home park that has vacant lots which are ready to be occupied, what value, if any should you place on these lots? We just came up with the value we are willing to pay based on the NOI and the cap rate we are looking for. So, unless these homesites will fill up with minimal effort and investment, I would not place much of a value on them at all. In fact, having empty homesites that are hard to rent out will end up costing you money in terms of monthly maintenance and time. I would definitely point this out to the seller as a negotiating point. Many sellers like to say there is upside on all the vacant spaces. However, if this upside was easy to obtain, then the seller would have most likely realized it before selling.

In some cases, you will be able to fill up the homesites with minimal investment and effort so you may place a value of 25-50% depending on your comfort level. I would definitely lean toward the 25%.

Park Owned Homes & Notes:

When purchasing a mobile home park where there are park owned rentals, rent-to-own homes, and mobile home notes it is important to break out the income and expenses from this portion of the business from the lot/space rental portion.

Many times the income and expenses from the entire operations are lumped together and the seller or broker says the property is priced at say a 10 cap.

Here is the problem with this approach of lumping it all together:

Suppose you have 10 mobile homes that are renting for $350 above the normal lot rent per month and that there is an additional expense of $100 per mobile home each month. You basically have a net of $250 per month for each home or $3,000 per year. If you are capping this income at a 10 cap, you are placing a value of $30,000 per mobile home. Now there may be some nice doublewides that are being rented in some parks that are worth $30,000 but it is not the norm. Most of the time, these homes are older singlewide homes that may have a value from $3,000 to $10,000. So if you are valuing them at $30,000 you are paying too much!

Another situation occurs when you have mobile home notes or rent–to–own homes. Lets say you have a note payment of $200 per month in addition to the lot rent and that the balance left is $8,000 on the note. The monthly payments of $200 per month will add up to $2,400 per year and if you cap that at 10% then you are paying $24,000 for an $8,000 note. Not a great investment move!

So what do you pay for these types of additional income sources?

Mobile Homes Rented Out: Many people will say that you should pay what the home is worth on the market if sold for cash or for cash with outside financing. My formula is that I will pay about 75% of what I feel I can sell the home to the current renter for on a rent-to-own agreement with a term of 3-5 years and also increase the lot rent in the process.. Here is an example:

A home is being rented for $425 per month and the lot rent is $200 per month. I will approach the current renter and tell them if they continue paying rent for 3 more years, then I will assign the title over to them and the home will be theirs. In the rent-to-own agreement, I specify that the lot rent is $225 per month(not $200) and after 36 monthly payments of $200 plus lot rent, the home title will be transferred to them.

In this case, I would not only be receiving 36 x $200 or $7,200 for the home, but I have also increased the lot rent for that home in the process. When I get ready to raise rents for other residents in the park, I can always say that there are other people already paying the higher rates. So, in this case I would pay somewhere in the $5,000 to $6,000 range for this home. ($7,200 x 75% = $5,400)

Mobile Home Notes and Rent-to-Own Agreements: When I am purchasing notes and agreements that have already been created by the current seller, I will typically use the lower of the value of:
• 75% of the value of what I can resell the home to a new renter in case of default as calculated above; or
• 65% of the future note or rent-to-own payments.

My initial answer is to buy mobile homes when they are located in or you will move them into a park that you own. If this is not possible, then focus on buying homes in the 5K range in parks that have rents under $250 per month. Most customers can only afford $500 per month on lot and home payment and when you have a lot of room between that $500 and the lot rent you are able to sell and get paid back quicker.

Dave Reynolds

Sonny,

Before selling your mobile home park you might want to try to maximize the value of the park. Here is a list of 10 ways to increase the value:

1. Raise Rents: A $10 per month rent increase at a valuation using a 10% capitalization rate, can increase the per lot value of $1,200.

2. Submeter Water and Sewer and Trash: By installing water meters and billing the residents back for water and sewer and trash you are in effect increasing your bottom line. I often think this is one of the most equitable ways of to pass on expenses to the residents as they only pay for what they use. In my experience when meters have been installed the master water and sewer bill is reduced by 30-40% as your residents become conscious about the amount of water going through the faucets. Leaky faucets are fixed, toilets no longer run continually, cars are not washed every day, etc.

3. Enforce Rules and Leases: By enforcing reasonable rules and regulations your community will be regarded as a safe and comfortable environment. Get rid of problem tenants. If you are worried about losing the rent from one or two problem residents, consider that you may lose even more good residents and potential residents by keeping those that are causing problems and not obeying the rules.

4. Reduce your Property Tax Expense: Contact a company that specializes in going to bat for you with your county tax assessor to get your valuation and taxes reduced. Many states and counties base the assessed value on the purchase price. However, most mobile home parks should have a business value component that should not be taxed as property tax. These companies often work for a % of the reduced taxes thus no money out of pocket.

5. Reduced other ongoing expenses: Get multiple insurance quotes, evaluate telephone costs and extras, negotiate with plumbers and electricians to get a lower hourly rate, etc.

6. Fill vacant lots: How much is a vacant lot worth? In many cases, a vacant lot is actually costing you money to keep the grass mowed, the lot clean, and so on. If your lot rent is $200 per month and based on a simple formula that a lot is worth 60 times the monthly rent, then an occupied lot is worth $12,000. Would it make financial sense to spend $2,000 to cover the home moving costs of a potential resident? I believe it does. Other incentives I have used include, free or reduced rent for the first year or two, free installation of new skirting, free steps and decks, and the list goes on. Be creative and stay ahead of your competitors. It is much more effective to come up with 50 ways to market to one customer rather than 1 way to market to 50 customers.

7. Buy homes for Resale or Rental. Buying used homes and placing them in your community for resale or rental is another way to drastically increase the value of your community. As mentioned before, each time you fill a vacant space, the value of your park increases. As a community owner you have an advantage over most mobile home retailers in that you do not need to make a profit on the sale of new and used homes. If you profit by $12,000 per space in equity each time you add a new home, you can sell the homes at breakeven and be way ahead.

8. Increase the Curb Appeal: Encourage residents to clean up their yards and property. Hold clean up days on a monthly basis. Have new and attractive signs installed at the entrances. Repair roads and maintain adequate street lighting. Have monthly rent discount incentives to the residents for things such as: Property of the month, most improved property, etc. Additionally, financing for your residents such things as new skirting, paint, wood siding, and other outside improvements can get the homes looking better as well.

9. Add additional income sources: If you have some vacant land, consider adding some mini storage units, or fence it off and offer storage for RV's, Boats, and extra automobiles. If you have highway frontage, look into placing billboards or selling easements to billboard companies. Look into getting Cable TV or Wi-Fi for the entire park and in doing so, your residents will get a break on these costs and you should be able to profit as well.

10. Dedicate streets and utilities to the city. Although is not too common for established communities, if you can talk your city into making this happen, you just reduced your exposure to street repairs, utility repairs and metering.

Once you have done what you can to maximize the sales price you need to consider who your buyer is. Here are some additional selling tips:

Mobile Home Park Selling Tips:

One question we frequently get from individuals and companies that are listing their mobile home park for sale on our site is "How much information should I include in my listing to be posted"?

We have always taken the stance that you can place as little or as much information on the site and will continue to do so. However, based on my experience with selling my own parks on the site I have found that the following formula works the best:

1. Include a description of the park - number of spaces, occupied spaces, monthly rents, acreage, size of spaces, whether the streets are paved or gravel, and type of utilities and who pays what.

2. Include a description of the area - population, major employers, surrounding structures, and other important demographics.

3. Financing and Terms, if any. If there is not owner or assumable financing you may want to talk to some finance companies before listing the park to see what the potential loan and terms may look like for a qualified buyer.

4. Income and Expense Statement - I typically include Projected income based on current occupancy and Actual expenses from the previous year with adjustments for any differences. By including fictitious statements or those that are missing important information, the credibility of the seller will be compromised. If the income and expense statement looks bad, then either don't include it in the listing or else explain why it looks so bad and how it can be improved on.

5. If you do not want your manager or residents to know the park is for sale then for the location make sure that you make it General (like Colorado or Southern California). You are not required to list the park name and address.

6. A description of any park owned homes and notes. If possible I would recommend you separate the income and expenses from the park owned homes out from the lot rent portion.

7. Pictures - that is often the first question you will receive. If you don't have a way to scan these or email them to us to post them in the listing, then you can always snail mail them to us and we will scan them on. Like the saying goes... a picture is worth a thousand words.

As a general rule, the more information you post the better qualified the leads will be that you receive and the less information you post the more inquiries but the less qualified the leads will be.

As for the ultimate pricing of the park you will need to decide if you want cash or can owner finance. In today's market you will get a much better price if you can offer terms as the lending is tough for all types of investments. If you need to sell for cash then you need to keep in mind that you can only sell if the bank and appraiser will be ok with your selling price. The days of overvaluation are over.

As a general rule, on a park where the residents pay the water and sewer then the value of the park is around 70 x Number of Occupied Lots x Average Lot Rent.

If the park pays the water and sewer then use 60 instead of 70.

This is assuming about a 10 cap rate. On a senior park that is 100% occupied then you might be able to sell at a 8 cap and on a park with vacancy in a rurul market the cap may be as high as 13.

Long post but I thought it would be helpful.

Dave Reynolds

Sean,

I see my good friend Jim posted a good reply and I can vouch for the park he has in Colorado as we owned it together until he bought my interest out.

As for your question. Mobile Home Parks can be great investments as other types of real estate. However, the big thing with parks is that you can actually cash flow from day one and sometimes that cash flow can be significant.

However, buidling a new park is probably not the answer. I have purchased over 60 mobile home parks and about 1/2 of them cash flowed from day one. The other 1/2 of them involved some type of turnaround situation. The turnaround can take a lot of extra money so you need to recognize what type of park you are getting into.

The logical first step is to read as much info out there on the subject as you can, drive through parks, practice evaluating them, and if you are serious invest in some of the books and courses on the business.

Best of Success!

Dave Reynolds