Of all the expense categories to get a handle on when buying or operating a manufactured home community, perhaps the hardest is “repair and maintenance”.
In over twenty years of pouring over budgets for various properties, I’ve discovered many facts and assumptions that I use today when tackling this difficult calculation.
Inaccuracy of seller data
Seller numbers on repair and maintenance are notoriously wrong. They either don’t even report these costs (as they often do the labor themselves) or they do so incorrectly. Let’s take, for example, a repair to the main water line. If you called
a normal plumber to come out and fix it, the bill would be $1,500. But the mom & pop seller used their own back-hoe to dig the hole and then bought some parts for $20 and installed the patch (even though the repair is not done correctly) and, as a result, the repair cost $20 on the owner’s books. Is that accurate? Only if your intention is to keep on fixing leaks that way yourself, and you value your own time at zero.
Too many variables
And then what happens when the patch fails and the water is leaking again two weeks later? Should you count that as a real additional repair cost, or is that still part of the original problem? And then what if the backhoe breaks while your digging it and costs $3,000 to fix? As you can see, there are many variables that make trusting mom & pop’s numbers somewhat risky. And, unlike the water, sewer, electrical, insurance and every other line item cost on the budget, the repair and maintenance number has no source for the information but the seller.
Capital expense vs. repair cost
Another problem is that many sellers get confused on the accounting issue of “capitalizing” vs. “expensing” the cost. A “capitalized” cost is one that is based on adding permanent value (like pouring a new concrete pad for a home to sit on)
and a repair “expense” is one that is just a one-time cost to keep something working. “Capitalized” costs go on your General Ledger as an asset which can be depreciated, while an expense goes on your profit and loss statement. I’ve seen sellers capitalize repair expenses and vice-versa. I’ve even seen sellers buy new cars and put them in as repair costs. These are huge issues when trying to provide accurate estimates.
Using an estimate for “older” properties
So if it’s nearly impossible to track down the real repair costs for most properties, how do you budget going forward? I have found the answer to be using a “plug” number that is reflective of past experiences. The industry “plug” number for repair on older properties is $100 to $175 per lot per year. In a 100-space property, that would equate to $10,000 to $17,500. Is that 100% accurate? No, it’s a best guess. It may be that your property only has $6,000 in repairs that first year, and then $14,000 in year two, so my general experience has been that it’s pretty darn close. And what is an “older property”? That would be one that has older utility lines, such as galvanized metal water lines and clay-tile sewer line construction.
An estimate for “newer” properties
The industry defines “newer” properties as ones that have modern PVC water and sewer lines. And on these properties most operators use a “plug” number of $50 to $100 per year per lot. The reason that it is substantially lower is that PVC garners only a fraction of the water line leaks and sewer blockages/cave-ins as the communities with the older lines. That being said, you are still going to have many of the same issues as the older communities – people driving over water risers on vacant lots and cooking with lots of grease that blocks the lines and requires roto-rooter. While the repair costs may be lower, they are never going to go completely away regardless of how your property is constructed.
Most manufactured home communities we buy have been around for over a half-century and will be here for centuries to come. Repair costs go up and down and you have to see your performance over a long timeline. Just because your older community has only $2,000 in repairs for the first two years, don’t mark your budget down to $2,000 for year three, as that year you might be at $20,000. It’s all in normalizing numbers over the long term, and you may need ten years of operations to truly see what this property’s repair numbers should be. If you use my “plug” numbers, don’t mistake being lucky for having uniquely low repair issues. Give it time.
Calculating proper repair and maintenance expense estimates requires a leap of faith, as you really can’t take past performance, as reported from mom & pop, as accurate.
Consider using a “plug” number based on past experience, and you’ll be miles ahead in formulating an accurate budget
Dave Reynolds has been a manufactured home community owner for almost two decades, and currently ranks as part of the 5th largest community owner in the United States, with more than 23,000 lots in 28 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. He is also the founder of the largest listing site for manufactured home communities, MobileHomeParkStore.com. To learn more about Dave’s views on the manufactured home community industry visit www.MobileHomeUniversity.com. This article originally appeared in the Manufactured Housing Review, subscribe for free here.