Looking at another park

[Samuel Coronado]

I have another one I'd like to discuss. This is 5 mobile homes and one building being remodeled as a storage unit. 4 park owned homes and 1 tenant owned home. The POHs are $800 a month and the TOH is $300/month. Gross income right now is 2700. When renovations are done (the studio and one of the POHs), gross income will be 4000/month (500 for studio, 300 TOH, 800x4 for the POHs). The property is located in a prime growing area in northern Alabama. It's similar to another park I've done well with the last year. Septic, nonpermanent foundations. The seller has considered seller financing with 20% since this is a paid off property. Wondering what the best entry point would be. They originally wanted 360k, but the mortgage would have the property running negative for the foreseeable future until all renovations are done, which I won't do. 

[Sean Barnebey]

This is an interesting opportunity, and it sounds like you’re approaching it wisely by considering the numbers carefully. Here’s how I’d break it down and strategize your entry point.

Key considerations include the current and pro forma cash flow. The current gross income is $2,700 per month or $32,400 annually, while the pro forma gross income after renovations would be $4,000 per month or $48,000 annually. Before renovations, the property isn’t cash-flowing enough to justify a $360,000 price tag, especially if financing eats into potential profits. However, after renovations, the numbers improve significantly, and the challenge lies in bridging the gap between current and future performance.

Expenses typically run at a 30-50% expense ratio for mobile home parks, depending on management and infrastructure conditions. Assuming a 40% expense ratio, the net operating income at the current income level would be around $19,440 annually and $28,800 after renovations.

At a $360,000 asking price, the cap rate based on current NOI would be 5.4%, which is low for a park with park-owned homes and required renovations. At the pro forma income, the cap rate would rise to 8%, which is more reasonable but only achievable after renovations. The price should reflect the current performance, not the seller's expectations for the future.

Seller financing is a big plus. Negotiating favorable terms like a low interest rate or interest-only payments for the first few years could help manage cash flow until renovations are complete. If seller financing is the route you go, you might consider getting creative with the structure to make it work for both parties. Options like a unique amortization schedule or a 3/2/1 or 2/1 stepdown interest rate could provide initial relief to get you through the renovation phase while giving the seller confidence in a structured payoff plan.

To determine an entry point, consider reducing the price based on the current NOI. Given the current NOI of $19,440 and a reasonable cap rate of 8-10% for a park with park-owned homes and septic systems, a fair price would range from $194,000 to $243,000. Paying a bit more might be justified if the pro forma income is very achievable, but $360,000 seems too high unless renovations are already complete.

Factor in the costs and timeline for completing renovations for the studio and the fifth park-owned home. These should be reflected in the purchase price or negotiated as part of the terms, such as the seller carrying some of the renovation burden.

Use seller financing to your advantage by proposing a price closer to $225,000-$250,000 with terms such as 20% down, a low interest rate (4-5%), or interest-only payments for 3-5 years, with a balloon payment once renovations are complete and cash flow stabilizes.

If the seller is firm on price, consider negotiating higher down payment terms to reduce the financed amount, paired with interest-only terms or a price reduction tied to renovation milestones.

Key questions to address include the condition of the septic system, which can be a significant expense if it fails. Verify its condition and ensure the seller discloses any known issues. Consider tenant stability, including consistent payments and maintenance of the TOH. Finally, double-check local demand and rent trends in the area to ensure the pro forma income is achievable.

I’ve worked on several mobile home park deals as a broker and am currently helping a few clients sell their parks, so I know how important it is to ensure the numbers make sense both now and in the long term. Leveraging seller financing creatively, with strategies like stepdown interest rates or unique amortization schedules, could be the key to bridging the gap until the property reaches its full income potential. A fair entry point seems closer to $225,000-$250,000, but the terms of financing could justify going slightly higher if cash flow can cover the payments. Let me know if you’d like help running specific numbers or refining your negotiation strategy.