Thoughts on competing with a big player

[Derek Williams]

I'm looking at a park in the midwest that is a fantastic property from the numbers. It's a small park with about 40 lots in a city of about 70000 people. 30 lots are filled by tenant-owned homes, the other 10 lots are vacant waiting to be filled. Even with the 10 empty lots, it has fantastic cash-flow and we can get it at about a 13 cap. I've gone over all the numbers inside and out and it seems to be a true 13 cap and there's strong upside in submetering and filling the lots -- if we can.  That's where I'm running into a challenge. There are 6 parks in this city and 3 of them are owned by the same company - a total of about 600 lots. This owner is also the biggest dealer of mobile homes in the area. He's got new and pre-owned homes for sale in his parks and his lot rent is about $20 less than the park I'm looking at. I don't know what the homes sell for, but they are pretty nice looking homes, I would guess on the used homes that none are older than 10 years.  My partner and I were just about to pull the trigger on this deal when we found out about this company while we were trying to find mobile home dealers we could possibly work with to get the lots filled. We happened to talk to the owner of the company (he didn't know we were in the market for a park) and he was telling us how the trend is that the little parks are dying because they can't compete with bigger players who essentially control the market. These guys pretty much control the home supply in the city and have real nice looking 4 and 5-star parks in the city that it seems people may be drawn to more than our little 3-star park. It seems like this might be a fatal flaw for this park. 

However, I also wonder if maybe the cost to get in a nicer home is still high enough that there's a market for cheaper homes. Walmart still does great against Target. What are your thoughts on going up against a bigger, nicer player? Obviously, as a small investor (with a budget in the sub-$500K range) just about everyone's going to be bigger than us so unless we don't want to be in the market, there's going to be big fish we're going up against. How do you evaluate the competition and decide if there's enough of a market to compete favorably? 

[Chris Reeves]

Hi Derek,

You have not given us enough information to answer your question - you seem to be quite worried without having the data. Do the following research, then get back to us:

1 - Find out how much the other company is selling their homes for - the full range from cheapest to most expensive.

2 - If you haven't run test ads in your market yet - do so. If you have, tell us what the results are.

3 - What is the unemployment rate, the average 3 bedroom apartment rent, the city and the metro size for this city? What is the vacant housing rate? What has been the growth in population for the last 10 years? How diversified is the population? What is the median home price? You can find out most of this at bestplaces.net

4 - I would re-do your cap rate calculations based on a $20 lower lot rent - unless your location is much better.

Lastly, in the long run if you have growth and the other guy fills his parks to capacity there is probably room for both of you.

Now run along - answer questions 1-4 and then I'll try to help you.