WHAT do i do about the balloon payment? Good deal?

Question

I hope I can get some good feedback, thanks in advance..

Ive been negotiating with a mh park seller for a couple months on a park on a very populated highway with new development emerging around it.  That is not why I want the park though, I am in it for the mh park itself.

13 Lots

Currently @ $260/lot   (will be increasing by at least $25)

water: $200/month         sewage: $488/month     taxes: $250/month  trash:$40/month  insurance: $110/month

9 lots currently rented  Homes on 2 vacant lots need removed

Purchase price: $119k

I got seller to hold the note for 12 months, at $5k down.  My question(s) is, does this look like a good deal, and what happens if I cannot get the money in 12 months (bigger fear)?  Ive never purchased a mh park before (just mobile homes), nor have someone not 100% finance a property to me.

Richard Rachal · Answer

Yup. Looks good. The rule of thumb for analyzing a deal is:

# of rented lots x CURRENT rent x 70

In your case, 9 x 260 x 70 = $163,800

This is per Frank and Dave with mobilehomeparkstore.com. Arguably the gurus of MHPs.

What you are missing from your expenses is a management fee. I'm assuming the $250/mth in taxes is for county park taxes and permits. If it isn't, you need to account for it.

You of course need to a spreadsheet analysis to see if it meets your investment criteria.

Curt Smith · Answer

A 12 month balloon is crazy!  A bank may take 6 mo to close.  I won't even do 5 yr balloons fro the same reason.  7 yr and longer are safer.

In my view the seller is going to get the park back only in fixed up shape.  Sorry to rain on your deal.

I would stop and re-negotiate the balloon term.

Dawn Young · Answer

I'm trying to learn here, too, hope you dont mind--if i ran the numbers correctly, (straighten me out if im wrong) your net $300-$400 before the mortgage payments?  So after that $600 approx, you'd be having negative cash flow, till you got the 2 lots rented, and then you'd net about $300?  Less, because you'd be financing your foundations?  That seems low to me.  Bummer!

I was talking to a broker about mhp, a couple days ago---about a 6 space park----he said, that the problem with the small parks (less than 16 spaces or so) is that they have all the hassles of a big park, but less money.  On the other hand, how else are people like us (without a huge down payment) going to get in?

I wonder, just curious, do you think this park is going to grow in value quite a bit?  Or is there anyway to get more cash flow from any extra land/amenities?  Some of the parks in ID have extra tracks of land that can be short plated off, and sold, with mortgage holder's approval, of course.

Richard Rachal · Answer

@Justin Escajeda - It sounds like you're already over-improving the park. If it is a lower-quality park, you don't need poured concrete pads. That's overkill - unless your county requires it. If the pads need to be rebuilt, consider crushed concrete. It's usually cheaper than both limestone and poured concrete and is perfect for pads.

Is the county making you update the electrical and water? Do you have exposed / uninsulated wiring showing? Several leaks in the water line?

For your mobile homes that need to be torn down, put two Craigslist ads listing the homes for 1 - free scrap and 2 - free mobile home, needs to be moved. Also call a few of your mobile home movers and ask them if they would move the home out for free if they kept / sold the scrap.

If the homes are really in such poor condition that they can't be moved, just make the Craigslist ad listing it for scrap, wait a week and then just order a roll-off dumpster. Offer your tenants 1/2 months or a month of free rent for them to put it in the dumpster for you. Sources for cheap manual labor are readily available (especially on CL).

What are the banks requiring for them to finance it? Have you gone to the small local banks and credit unions in the area? If bank financing is completely out of the picture, make a marketing package for investors and make yourself known at your local or nearest REIA. This isn't going to be easy, but nothing in life worth doing is.

Most owner financing works like this, you give them a down payment the day that you close (in your case the $5k) and then start making monthly payments ($610). Did I read that correctly that the seller increased the purchase price $16k if he did owner-financing?

Jerry Kisasonak · Answer

Hey Justin! I would write up a business plan for the park and approach banks with the deal NOW to see what the prospects look like for your refi in a year. That's the best way to get a feel for the end-game financing in my opinion. Of course, like all things, you'll need to shop it around - especially since it's a mobile home park.

Justin Escajeda · Answer

Thanks!  I should also mention here that there is a good bit of work to do within the park.  This is a low class park (I forget how to correctly categorize them).  Electrical and water needs updated, 2 homes need torn down (highly doubt they can be moved), gravel pads need updated to concrete (which will be done as homes get replaced - but 3 right out of the gate need poured), and there is no management fee btw.

The thing is I am only clearing around $400-500 a month here, and it is NOT easy getting financing locally in Pittsburgh for a mh park.  I suppose my main concern is that I do not get all the necessary work done within the 12 months.

Since I am giving the owner $610/month for a year (@4.2%), will that money go towards the down payment of the park?  Or just get taken off the purchase price?

Dawn Young · Answer

thank you! Yes I love mobile home park university.  I just finished reading their free e-book.

Richard Rachal · Answer

@Dawn Young - the bank we deal with requires 80% LTV on market value. Coming up with the other 20% you either need cash, some other source of cash, or most favorably, seller financing. If I were Justin, if there were any money due to the seller after getting bank financing, I would either ask the seller to finance the rest and modify the terms, pay the difference in cash, ask an investor to spot the money, etc.

@Cody Steck - see the link below:

http://www.mobilehomeuniversity.com/articles/evalu...

I personally see the 70 multiplier as function of an expense ratio and a cap rate derived in a single number. Just makes the math easier. But, in a nutshell:

Current Monthly Income = Current Lot Rent x # of spaces rented

Market Value = (Current Monthly Income x Monthly Expense Ratio) x 12 = Annual NOI / Cap rate = Market Value

The monthly expense ratio for Justin's case is 46% ($1088 in monthly expenses / monthly income)

The 70 multiplier is essentially = (1 - Monthly Expenses) x 12 / Cap Rate.

Using Justin's #'s, this rule of thumb indicates a cap rate of 10.8%, which, in our market is pretty good and would attract a buyer fairly quickly.

That may be too much. It's just Frank and Dave's rule of thumb. I don't want to over complicate things. Using the 70 multiplier follows the same process that a lot of people use when buying SFR on a 10x of attainable monthly rent - same logic and math. These guys have done some serious deals and are the 10th largest owner of MHPs in the nation, I just tend to listen to them.

Ultimately, a spreadsheet analysis should still be done to confirm if the purchase makes sense to the buyer. I may buy something that Justin would balk at and vice versa.

Cody Steck · Answer

@Richard Rachal

# of lots rented X current rent X 70

Where are you getting the "70" in that formula? and what does it represent?

Dawn Young · Answer

@ Richard, don't the banks in Louisiana require 20-30% down (70-80%ltv)? Justin, i wish we had reasonably priced parks here in Wa state!

WHAT do i do about the balloon payment? Good deal?

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