I have been appraising non-residential property for almost a decade. My primary geographic areas are eastern Minnesota and western Wisconsin. As a commercial appraiser I have appraised a wide variety of commercial, retail, industrial, and multiple family properties. Appraising mobile home parks is somewhat of a niche market among appraisers, but the process is similar to appraising many property types.
The appraisal side of the mobile home park transaction is not one that is discussed often. I have found that often times many involved in real estate transactions do not completely understand the appraisal process, or what should be included in an adequate appraisal. This article will focus on the approaches to value that should be used when valuing mobile home parks. Future articles will get more specific into the data collecting, valuation processes, and how the appraisal can be an advantage for the investor.
The three traditional approaches to valuing real estate include the Cost Approach, Sales Comparison Approach, and the Income Approach. It is important to understand that all three approaches are not always appropriate for every property type.
The Cost Approach is not typically used when appraising an existing park. In my geographic area there have not been any new parks constructed recently to my knowledge. This has to do with the economic feasibility of constructing a new park. Also, many municipalities would not allow new parks to be constructed due to preconceived notions about potential tenants or homeowners. In some cases though, such as proposed expansion to an existing park, a cost analysis is appropriate to determine feasibility of new sites.
The Income Approach to value is the primary way to value a mobile home park. The Income Approach will analyze the subject’s historical and future rental income potential from lot rent and other sources, rent loss from vacancies and non-payment, and finally relevant operating expenses. The remaining income, or net income, is then capitalized to a value if the park and its income stream are stabilized. If the income or expenses are expected to change significantly over the investment period, a discounted cash flow analysis should be used.
The Sales Comparison Approach is also valuable in appraising mobile home parks. The appraiser will find and very information on sales of similar parks. Information gathered will include expense ratios, effective gross income multipliers (EGIM), and capitalization rates. It is not enough to only use a “per site” value derived from the sales. A per site value is a term that is often talked about, yet investors do not usually buy parks based on that method.
This is a quick summary of the approaches to value in a mobile home park appraisal. More detail and insight into these topics and others will be presented in the future.
Erik J. Hanson
7 Rivers Appraisal
La Crosse, Wisconsin