Evaluating MHP based on cash flow

[Philip Lamachio]

I've found a fairly dilapidated, smaller mobile home park (maybe 20 units?) that has only 1-2 actual tenants on the property with numerous abandoned homes. It sits on a very nice little pond in a rural setting by not very far from town.

The property is in a trust and looks like it was the victim of complete neglect by the family members it was entrusted to. I think it could be a good buy, primarily because it is very hard to get new zoning for MHP's across the country. 

It's not on the market, but I have located one of the family members who inherited it and have his phone number. I would like to try to put together an option to purchase the property as is, of course after doing all the proper due diligence. ( I suspect that much of the electrical and plumbing is shot...lots of work to bring it up, but it could be a beautiful place) 

Can anyone point me to a basic investor formula to evaluate a reasonable offer for this type of property as is, and determine what the percentage and length of an option should be? I have a basic grasp on how to determine ARV, but any suggestions there would be great as well.

I'm considering finding investors who can fund the restoration or considering simply assigning the contract to an investor in MHP's, as I haven't done anything like this yet. 

[Account Closed]

Phillip,

My partner did a deal like this before and I had a front row seat to how it was done.  It was a slightly different construction on the financing side, but this is essentially where he came up with the price:

The park was 32 lots, all of them had homes.  It had 2 tenants at the time of close.  The average lot rent in the market was $350.  The calculation went like this:

32*$350*12=$134,400 * 40% expense ratio = $80,640 / 10CAP = $806,400 of potential value + the wholesale value of 32 homes ($300,000) = $1,106,400 potential value

The current value at purchase of the property was effectively $0.  It negatively cash flowed but had some land value and value in the homes.

He decided that for him to put in the work, he would need to more than triple the purchase value against the potential.  Once he determined he would need to pump $100,000 into the property to turn it around, he came up with a purchase price of $200,000.  The equated to $300,000 all in.

He did this deal 23 months ago.  Since then, he's filled all of the units, even sold off a few.  Last month he got an appraisal for long term bank debt and that appraisal came in at $1.3 million.  More importantly, the property currently cash flows at around 70% against his $100,000 of invested capital (the purchase was funded by a hard money loan).

In situations like this, you should base your pricing around what the potential is and work backwards using whatever you feel your time and effort is worth.  If you can give the following specifics, I can probably help you come up with what this number might look like:

Lots with homes on them:

Average Lot rent in the market:

Water/Sewer system + who pays (tenant/park):