Need help analyzing a mobile home park deal - South Oregon Coast

[Tony Ngo]

We're looking to buy our first mobile home park and need help.  All homes are owned by tenants.  Homes are older but we don't know the age of the homes It is on septic and wells.  The seller is asking $850k.  What is a reasonable number to offer?  We're looking for double digit cash on  cash return.  What's a normal cap rate for MHP? 

Here are the actual 2015 numbers from the listing agent:

23 lots: 100% rented $7535 total per month. $90,420/year

7 lots additional can be developed: need to put $15k into it to make them rent-able.  There's a wait list of 8 people waiting to rent.  

Operating expenses for 2015: $23,592  

Management: 705/month

Recycle and disposal: 490/month

Electric: 188/month

Property tax: 200/month

Insurance 55/month

Monthly water testing: 35/month

5% maintenance and repair: 293/month

What other expenses should I account for?  Let me know if you need addition info to help me analyze this deal.  

[Jeffrey H.]

You average MHP with well and septic has a bit higher expense ratio than city services, which means it will be somewhere around 40% under proper management - and maybe 50% initially depending how much was deferred and given it's on the smaller side.  Don't fall under the trap that because the Seller has been squeezing the expenses by not performing proper maintenance (think septic pumping, tree trimming, road maintenance, deferred capital expenses) that this Park will always have a 25% expense ratio - it should be much higher and you will be lucky to have a single year under 30%.  With annual revenue at 90K per year w/ 40% expenses that's ~54K net.

I realize the west coast usually trades a bit higher than other parts of the country, so at an 8% CAP that's 675K - at 850K they are asking about a 6.5 CAP which is high in my opinion. @Jay Hinrichs has owned some MHP's in Oregon and can probably speak to this more...

When you run more detailed numbers on this you need to put your pro forma together how you will operate the place - do you want to run a Trailer Park or Mobile Home Court?

It will cost you a lot more than 15K to make 7 lots rentable.  You will need to add septic for them, utilities, roads?, pad prep, plumbing, can the well service the additional load at peak times, etc.  

On a side note, your diligence needs to be very thorough on the well and septic - these are coming under more state and federal scrutiny.  Get very comfortable with the well's compliance with EPA requirements and get several opinions on its performance and future compliance capabilities.  Same with septic - are these aerobic or gravity systems?  Does it look like biomat is clogging the leach fields?

If you don't have the MHU Due Diligence Manual you should get it when going through all of this...

Best of luck.