New to the game

[Kevin Mehner]

Hello,

I am fairly new to real estate investing. I just purchased a 4-plex in Utah to get started. It felt good to finally take the plunge after much analysis. The Oklahoma market has always intrigued me because I grew up in Oklahoma and it seems relatively inexpensive to invest in Oklahoma compared to Utah where I've started to invest. My brother is a dentist and he still lives in Oklahoma and he and I are interested in buying some property here.

MHPs weren't on my investing radar initially, but my brother came across a mobile home that's only three miles from his dental practice that looks intriguing, but again I am new to this and any feedback that you could give would be greatly appreciated. As of right now I've contacted the agent and we walked around the property for some time and he has presented me with the financials he has been given. I will share those with you:

The land that the mobile home park sits is 40 acres, all of which is included in the sale. Currently there are 90 pedestals hooked up and ready to roll. Of those 90, there are currently 45 occupied spots. Those 45 are paying $180 a month to live there. There is also the potential for an additional 40  spots that can be developed. I mean there are 40 acres, so you could potentially put a ton of mobile homes on there, but there is a plan for at least 130 in the future total.

There is a park 15 miles away that is renting for $400 per spot but it also has paved roads and a pool.

The owner estimates expenses to be $15,650 per year($2350 in liability insurance, $4000 in repairs and maintenance, $5200 in trash, and $4100 in utilities)

That puts the NOI at $81,850 just at current capacity even though there is a ton of room to grow it seems.

There are three chlorinated wells and two regularly maintained lagoons

There is also a 1500 square foot house on the property that the manager lives in that I can most likely get included in the deal

In 2006 the place  appraised for $675,000

The asking price is $550,000 

The land, the house, and the MHP have been in the owner's possession forever but he currently lives out of state. The daughter of the owner is the one currently managing the park, but it seems like she doesn't run a tight ship at all and it is poorly managed. She doesn't market at all and just doesn't seem to have a good grip on things. She would be interested in staying, but I told the realtor that the house needs to be included that she manages from on the property and that I would need to get a new manager that I trust if we are going to do this deal. The owner is 72 and I think there is an awkward thing with his and his daughter who is a poor manager and he wants to wash his hands clean from this property.

The other issue is because of poor management and because it's always been a family affair, there hasn't been a good record of financials. Just another example of poor managing. 

I'm very interested in it, but would like some feedback on how to analyze this and determine if it's a good deal. Obviously the NOI looks good, but I just wan't to make sure I'm overly cautious. Thanks!

[Curt Smith]

Kevin, you need to understand the 2 park models:  park owns the homes and rents them out, this is called "park owned" homes.  This is traditional rental model, the hardest to make money at, the highest expenses due to replacing broken and stolen stuff.  The other much more desirable is where the occupants own the homes, "tenant owned" where the park just gets "lot rent".

Your prospect sounds like lot rent, just $180/pad per month.  

Go to craigslist.org and look for what the actual price is today.  erentomenter.com and bestplaces.com are historical and blend surrounding prices.  You need to call and visit other parks.

$400 sounds like a park owned home park and that is home rent, not lot rent.  You need to be sure there is price increase potential in this park.  

I would seriously look at this park. Why, the expandability. Today thanks to clayton homes centry21 have recently (last yr) come out with home financing tactics that can fill a park with new homes at no cost to the park owner except for infrastructure: electricity, water, sewer, parking pad, deck / stairs. The home mfger takes the home rent, the park gets the lot rent for several years to pay off the home. There are several pricing / financing models. The goal is the bump up NOI at some future date thus dramatically increasing the parks value... then you flip it.

Never offer for non producing assets like vacant land.   Offer a well and lagoon park at 14% cap.  Going cap rate for a well run city utilities park is 9% to 10%.  Higher risk and needed improvements sell at high cap rates to reward the buyer.  Sure the seller will faint and you may need to raise the offer.  But only after waiting the seller out,,, sometimes 6 months or longer.

45 pads x $180 lot rent a month x 12 x (expense ratio see bellow) = NOI / cap rate = offer

Expense ratio is no less than 50% for 100% park owned homes, as low as 30% for 100% lot rent and city utilities.

so:

45 x 180 x 12 x .7 = 68040 / 0.14 = $486k 

I adjusted the offer price re the high risk for lagoon and well in the cap rate offered.

I'd only offer if there are NO issues at the city, county and state regulatory and those gov executive branches (elected commissioners, state reps, city mayor and board) plus of course the carreer regulators in the various inspector and permitting offices.  You need to verify they have a permit for 8 0 pads and that the existing 45 are following permitted pad spacing.

Always make an offer in writing!  Never walk from any deal.  Don';t bother with verbal offers.  Make it in writing on a good park specific contract form.  You never know 6 mo from now when a seller will have a change of mind.  Include proof of funds, a copy of a check for earnest money ($10k is good enough), a list of your "team" including commercial closing attorney etc.

Buy your offer contract form from the mobilehomeuniversity.com 30 days DD kit, about $995.   Parks especially but commercial in general have complicated issues that need to be in the contract and to protect your earnest money.  How long is your due diligence period before your earnest money goes hard (you've lost it if you back out)  IE seller warrants there are no legal actions, has valid permit to run a MHP, there are no toxic dump issues, the lagoons and wells have a current valid operating permit and has been inspected by applicable agencies,,, many many more.