Input on a difficult valuation

[Adam R.]

I am looking at a park that is only 35% occupied. The seller is proposing a sale price based on what they believe the replacement value to be, which is very far off from a valuation based on cap rate. I believe there is a lot of upside to the park after significant capital is invested to bring in new homes and make the other needed repairs. Does anyone have a view on how to value this park? 

[Frank Rolfe]

I have never seen this park but it would have to have a phenomenal location to make it worth going forward. You can only pay an amount that is supported by the ability to cover the mortgage, so you have to see what the true NOI is at 35% occupancy and that's your budget. If the seller wants to carry paper at some low interest rate or no payment due until you increase rents, that's fine. But replacement value on a park like that is of no value as far as what you can pay.

The big problem is: how are you going to fill the lots? New mobile homes are now costing $60,000 to $80,000 installed and used ones 1/2 of that. While you can buy a park at 80% occupancy and fill it over time, when you are at 35% occupancy you have to get to 80% before a lender will even look at it, and you are under the gun until you achieve that.

The bottom line is BE VERY CAREFUL WITH THIS DEAL. Any park that is less than 50% occupied (and we've done a ton of those deals over the past 25 years) is an extremely dangerous turn-around and will require a huge amount of capital and experience.