I've Got (Lots of) Questions. Hoping the Community May Have Some Answers!

[Jordan G.]

Hello All! Long-time lurker of the forums but I finally wanted to sign-up to ask the community for their input on some specific questions that I have and haven't been able to answer on my own.

I am a commercial real estate broker living in Chicago. For the past year and a half I have been brokering apartment buildings around Chicago. I have had good success so far and by all of my colleagues' and mentors' accounts I am moving quickly in the right direction towards a lucrative and successful career. That said, I have never had a significant interest in or passion for apartment buildings. They would not be my first choice to personally invest in, and if this is what I will be doing for the next 30 or so years, then I would like to be doing something that gets me excited and is not just work.

I have earned enough respect from my peers at this point to switch product types without ruffling many feathers and I am very seriously considering switching to a focus on mobile/manufactured home communities. There are certainly guys in our company that have had much success brokering manufactured home communities, however they mostly focus on seniors housing and the much "cleaner" stuff that tends to be found in the West, Southwest, Florida, etc., whereas I would be targeting midwestern states such as Illinois, Wisconsin, Iowa, Indiana, and later on Kansas, Missouri, Nebraska and Oklahoma where the parks tend to be a bit lower quality and are often rurally located.

For this to work, I believe I need at least a minimum of 1,200 or so parks in my farm area, each with a minimum of 50 to 60 lots, and a value of somewhere between $750k to $4M.

• --- 1,200 parks is an estimate based on my experience in the apartment world; this number could be higher or lower depending on the velocity of this product type in my markets.
  
  
• --- 50 to 60 lots because my understanding is that 40 to 50 lots is the minimum number of lots needed to provide the economies of scale to reward a passive/remote investor, and from what I've seen even the nicest parks in the Midwest typically don't trade for much more than $20k/lot with the bulk of them trading closer to $10k/lot or less; I would prefer that the majority of the properties in my database are large enough so that the prospective buyer market is not limited to a local buyer. Obviously this changes if there is a cluster of a few smaller properties that can be run from a central location, and I would still make an effort to network with local brokers and buyers to engage the local market were I to follow-through with this plan.
  
  
• --- $750k to $4M because of the time and money involved in driving to, underwriting, marketing, and brokering these properties, I need to make sure that I am working towards a commission that justifies said time, effort, and costs. I also believe that much above $4M and you are starting to alienate the majority of the private market buying this product type (my target market), and with the limited number of substantial players in this industry the majority of these transactions will be done principle to principle. Please let me know if you feel this notion is incorrect or if you feel that number is much higher/lower.

My questions are mostly in regards to the industry in general as it pertains to the way properties trade hands and the players involved. There are certainly enough parks throughout the states I mentioned that meet the minimum 50 to 60 lot threshold to build a sufficient database, but the difficulty I am having is due to the way these parks are valued-- some 40 lot parks trade for $1M+ and some 100 lot parks only trade for a few hundred thousand. My questions are as follows:

• --- Is there any way that I can begin to get a ballpark idea of which of these parks are decent product that is approaching the $750k threshold I mentioned without physically visiting each park, seeing the financials, and knowing how many homes are park-owned? I've considered tax records, population within a radius, whether the roads are paved/unpaved, vacant lots showing on google maps aerials, but none of these has seemed to provide a reliable indicator.
  
  
• --- In general, is there even a market for these lower to medium-quality, secondary/rural-located parks that tend to be dominated by single-wides?
  
  
• --- I have access to CoStar via my firm. However, CoStar is not perfect and I have already come across properties that transacted and CoStar did not record.  That said, CoStar only shows 43 sales since 08/01/2013 (one ytd) for the four states I see myself focusing on initially (WI, IL, IA, IN), and that number drops to 25 if I limit that search to sales $600k or larger. This number seems low to me, but I don’t know if it is because CoStar misses a lot of the sales due to the product type, locations, creative/seller financing, etc., or if this is an accurate number and there simply isn’t a lot of velocity in the market for these communities. Are there any other ways to track sales that you are aware of (trade publications or associations, specific research papers, etc.) that might be able to provide a more accurate estimate of how many parks transact each year? Or do the numbers I presented strike you as mostly accurate and there simply isn’t a lot of trades taking place?
  
  
• --- My understanding is that it is very difficult to get deals done when there is a large portion of park-owned homes. Is this true even when the seller has accepted a selling price that corresponds with generally accepted industry valuation methods? Or is the real issue that sellers simply lose motivation by the low values assigned by generally accepted industry valuation methods on park-owned homes? What is the tipping point in terms of park-owned homes? What percentage of parks meeting the criteria I outlined would you estimate are above this tipping point?
  
  
• --- There is is usually a discrepancy between what sellers think their property is worth and what buyers want to pay (and hopefully it stays this way or else I will be out of work!). However, my understanding is that this discrepancy is often much more pronounced in this industry since many of the parks have a large portion of park-owned homes to which not much value is assigned. In addition, many would-be sellers choose not to sell because the value they can get from selling they do not feel adequately rewards them for the annual return they would be foregoing by selling it, especially if there is more than a token amount of park-owned homes generating income. Financing can be difficult, especially in regards to the lower/medium-quality single-wide parks, and the culmination of all these elements results in a landscape where it is often difficult to get deals done. Does this reflect your experience? What would be your recommendations so that I might begin to weed-out the parks that are going to be low value, possibly unsellable time-sucks from the decent quality product that is sellable and there is a market for? Elaborating on this, I should mention I already have a basic understanding what makes some parks more desirable than others (type of septic, city vs private sewer, % of park-owned homes, age of homes, etc.). I am asking what would make a park very difficult/impossible to sell even if it is priced correctly.
  
  
• --- Is there any other reason that I may not be aware of that it is going to make it extremely difficult for me to break into this product type and build traction? (a firm that already has an extremely strong presence and dominates this space, a strong aversion/distrust of brokers by owners in the community, etc.)

I apologize for the long-winded post, but I wanted you to have a full understanding of my concerns as this is a significant decision for me. Thank you for any insight you may be able to offer.

[Jim Johnson]

Well Well Well... 

So in general, to figure out a parks value you need to know space rent and the number of lots. There is other data you can use to try to back door where space rents should be. If you look at a 2 bedroom, 2 bathroom apartment rental average, space rent amounts to about 1/2 of that number. So if rents are $500 / month, figure a good ball park for space rent is $250. Or at least the market should bear that. Most mid west towns, the smaller ones, will be in the 150 - 350 range. There is a very complete list of this data, but it is privately held and to my knowledge, not shared. If you were to data mine one park in each metro area, you will have a baseline. Some states have lists of mobile home parks, the lot numbers and the owners info. I know- I am on several of these lists. So you will have to adjust the number of lost you go after in each general area if you really want to stay over the $750,000 purchase price. If it was me- I would go after every park over about 30 spaces. You do not need to visit the parks to list them. Another option for the smaller parks is to develop a pocket listing list of buyers, and just market the data through that list. Well priced smaller parks go under contract in hours, not weeks or months. They close in 30 - 60 days with seasoned investors. 

Park owned homes give a false reading on your CAP rate. This is why they are very, very hard to price and banks go crazy when the contracts come in. So here is how you value them, separate out the lot rent- CAP it and you have the parks value. Now value each home at the 'blow away' value. If the home were to be blown off the park, what would the insurance company pay on it. You might deduct the moving costs if your really accurate. Your now selling 2 businesses- a mobile home park, and a flat apartment building, that does not hold its value. So 5 years from now the homes are worth less than today. Sellers and buyers should understand this, many choose to ignore it though. Like cars- the values lower until you hit a basic bedroom / bathrooms have value number. Also- there is more value for a 3 bed home than a 2 bed home- even if they cost the same. So add more tot he 3 bed, or take some away from the 2 bed. These parks have much more in the expense column, and they are much harder to sell because they are not as passive as a space rent only park. So even the CAP number is higher. How much- 1-2 points- more if the homes are very old, or lots are vacant. I bought a full park in Indiana- 76 pads, all park owned for about 350K. Once the park is fully converted and rented out as a space rent only park- I will market it for about 1.3mm. If you understand what happens with cash flow these deals will give you chills. So the deals work IF they are priced right. Learn how to value these and you will know which ones to list.

Most owners of parks do not know how to value a park. Because of this- someone says it is probably worth 2 million and they instantly have most of that money spent. Unwrapping bad information is a long task, but if you can walk an owner through the pricing process you can teach the owner what the value really is. This is the process I use to put deals under contract. I never toss out a number. I get a pad of paper and a calculator, and I ask they do the same. We both write down the same numbers and we both do the math. In the end- the numbers do not lie. If the owner still wants more- well for me it is time to walk. Let someone else list those deals. Maybe they will call you back when it does not sell. time suckers are parks that are overpriced. Price them right and they will sell right away. I listed a park a while back and had 20 calls the first 24 hours. You do not need to leave much chicken on the bone to make a park look really good. 

There are very few good brokers for mobile home parks. Remember your selling cash flow, not the Willis Tower. My park with all old single wide homes makes the same money per lot as the fancy double wide park up the street. In fact- it makes more. Because people get caught up in how it looks, many will not touch the older parks. Well- the CAP rates are then higher, and the cash on cash goes way up. No one steals homes from an older single wide park, everyone wants the big new ones. So the older parks can be much more stable and your inventory tends to stay.

ok- I am tired.