Price Reduction From Vacant Lot Loss (Advice Please)
Arkon, OH · Member since 2017 · 9 posts · 2 votes
I'm in the process of acquiring a 100 space park, the park has 60% occupancy. Purely based on the park income, the NOI @7.5 cap show a valuation of $1.0M, because of the land, POH and pads for expansion I offered $1.2M for it. My plan is to fill the 40 vacant pads to get to 100% occupancy, at which point the park should worth $4M. So that comes out to be $40K per home in the end.
But during the DD, I've found instead of 40 vacant pads, only 35 vacant pads are usable, so there is a loss of 5 spaces for me.
What is a FAIR way (to both sides) of reducing the purchase price to account for the missing 5 vacant pads? Because of the missing pads, instead of getting to $4M, I could only get to $3.8M at the end of the project (loss of $200K). I don't want to ask for an unreasonable reduction because I might loose the deal, but I also don't want to be short changed.
Love to hear what y'all think.
So let me free think here.
At the end of the day you are buying a 95 space park with a 75k NOI and a 6.25 CAP for 1.2 million. You say you are 'overpaying' in a sense for the POHs, land and empty lots of 200k. The POH income is in the front half of the deal, vacant land is included in the vacant lots. So in essence you are paying an extra 5k for each empty lot. Take five off that premium and your at 1.175 million. 25k less. You could try that but I can see the seller not being interested in a big price reduction due lost potential earnings on something he has not done or you have not done yet.
A fair price reduction would be based on the original price per lot ($12,000 x 5) or $60,000.
Just want to clarify how you got there, to get to $12K you divided 1.2M by 100 lots (of which 60 has homes on them and producing rent, 40 lots are vacant). That means I can value the 40 vacant pads the same as those 60 income producing lots?
Seller seems to think the vacant pads are worth very little, and of the 1.2M paid, most of that goes towards the income producing pads (with homes on them)...because the "CAP rate could not apply to vacant lots".
Does anyone with appraisal experience can shed some light on this?
So let me free think here.
At the end of the day you are buying a 95 space park with a 75k NOI and a 6.25 CAP for 1.2 million. You say you are 'overpaying' in a sense for the POHs, land and empty lots of 200k. The POH income is in the front half of the deal, vacant land is included in the vacant lots. So in essence you are paying an extra 5k for each empty lot. Take five off that premium and your at 1.175 million. 25k less. You could try that but I can see the seller not being interested in a big price reduction due lost potential earnings on something he has not done or you have not done yet.
Just want to clarify how you got there, to get to $12K you divided 1.2M by 100 lots (of which 60 has homes on them and producing rent, 40 lots are vacant). That means I can value the 40 vacant pads the same as those 60 income producing lots?
Seller seems to think the vacant pads are worth very little, and of the 1.2M paid, most of that goes towards the income producing pads (with homes on them)...because the "CAP rate could not apply to vacant lots".
Does anyone with appraisal experience can shed some light on this?
At the end of the day you are purchasing a CAP rate. Nothing more. That is why club houses, fancy mailboxes, flag poles, paved roads and beautiful signs are not to be considered. Focus on the accuracy of the CAP and if 6.125 works for you then plow ahead. Raising the rents, billing back utilities and growing the gross income on the park are all your future opportunities and for you to capitalize on.
I bought my first park and it was only 40% full. The CAP on that was fair and enough for me to cover my expenses, debt payment and put some cash in my pocket every month. Over next 18 months I filled the park (70% hard work and 30% luck) and that is where the real payoff came.
I guess what I am saying is don't let a few thousand dollars at the front of the deal get in the way of the reward you will reap at the end of the deal. If you play this right you will be set up for life and you don't want to look back and regret the nickel and dime negotiating that cost you a huge upside.
Use the extra space for RV/Boat and Camper parking for your tenants. They will appreciate that.
That is what I did. Found a park that was closing and started knocking on doors.
I'm in the process of acquiring a 100 space park, the park has 60% occupancy. Purely based on the park income, the NOI @7.5 cap show a valuation of $1.0M, because of the land, POH and pads for expansion I offered $1.2M for it. My plan is to fill the 40 vacant pads to get to 100% occupancy, at which point the park should worth $4M. So that comes out to be $40K per home in the end.
But during the DD, I've found instead of 40 vacant pads, only 35 vacant pads are usable, so there is a loss of 5 spaces for me.
What is a FAIR way (to both sides) of reducing the purchase price to account for the missing 5 vacant pads? Because of the missing pads, instead of getting to $4M, I could only get to $3.8M at the end of the project (loss of $200K). I don't want to ask for an unreasonable reduction because I might loose the deal, but I also don't want to be short changed.
Love to hear what y'all think.
Seems to me that you're not really going to get much off the 5 lots not being usable. Based on your numbers it seems you made your offer on the existing income anyway with a little bit for the potential growth of the unfilled spaces but probably not much. On a 1.2 million dollar deal that you can get to 3.8 million, do you really want to lose the deal for 20k?
Here's the other question. How much would it cost to get the other 5 units usable again? Is it a matter of utility connections or concrete pads? Or is that there were never really 40 pads to begin with? If they represented pads that didn't exist then it would seem fair to ask for something of a credit (20k?). If its a matter of repairs to bring the 5 unusable ones up to par, then get an estimate for those repairs and ask for that amount. That would seem to be reasonable.
But again, the deal looks pretty good. So while it can't hurt to ask, I don't know that it makes sense to put a line in the sand for a credit either. Hopefully, the five unusable pads have some sort of repair number that you can give them to make them usable so you have something concrete to give them. That would be more logical.