| Valuing a Mobile Home
Park:
excerpt from
Mobile
Home Park Investing, by Dave Reynolds
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 renttoown 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. |
