22 unit Mobile Home Park for 250K-Is this a good deal, advice?

Question

Hi,

Recently my offer was accepted on a 22 unit MHP . It's taken a long time. Park owner filed bankruptcy, he's been out of picture and i've been negotiating directly with bank. When owner left town he didn't leave any financial/tax records so I've had to do some leg work/investigating to ascertain financials. I've done this by talking with current property mgt. Co. and knocking on doors of MHP with my realtor? Current PM of 10 yrs has been very helpful as he'd like to stay on for new owner (me) and i believe he's been honest with current scenario and showed me rent roll collecting for bank. My real estate broker has been very helpful as well, he owns several parks of his own and is well respected in community-he came highly recommended for MHP investing. He says this is a steal. However, i was hoping to get some additional perspective as it can't hurt, I don't want to miss anything.

here's offer bank accepted:

250K purchase w/ 20% down. I have a good financial profile and excellent credit. I haven't discussed additional terms with bank (interest rate, term, fees, etc.)

1. I don't want to get a bad deal on the back end of this deal with financing. Any watch outs, pitfalls and general guidelines when negotiating with bank for MHP loan? Acceptable terms, rates, interest rates, etc-any advice? As i don't have previous years tax returns for park, it limits my options and that's why i'm talking with bank that owns current mortgage as they are willing to be flexible and motivated by current owners bankruptcy.

About the park:

22 units total.

15 rented and paying at $275 mo. lot rent. All long term tenants. (15X$275=$4,125 mo.)

1 vacant pad (needs trailer)

2 delinquent tenants

PM says one needs to be evicted and other always pays when he gets taxes back for last 9 yrs but I'm counting that as a vacancy

1 lot that has newer century 21 trailer on it for sale that's not paying lot rent

How does this work, how do i get this company to pay lot rent?

3 lots with vacant trailers that come with sale (2 of which need serious rehab)

with rehab, PM says i should get $600 a mo. per owned trailer

Would you keep ownership of trailers or sell trailers and only collect lot rent?

Considering purchase price of $250 w/ 20% down-assuming 15yr at 5% loan-Is this a good deal at where MHP park sits today with vacancy's?

Expenses paid by landlord (bookkeeping, taxes, PM fee, snow/lawn, utilities, maint., insurance, water/sewer)=$17,355 annually. numbers provided by PM. Public water. Septic systems. tenants pay own trash and water. Am i missing expenses or should i add in $ for potential additional costs, what are they?

of note, I have an old appraisal from 11/2013 of $375 but this is when park was fully rented. i've been told vacancy increased over last 18months due to owner leaving.

The good, the bad and the ugly? What should i be looking out for? What am i missing? Thank you all in advance for your considerations and time.

Best regards,

Chris-

Rob Chamberlain · Answer

I have owned a park for almost a year and here are a few things I have learned. I bought a park for a great deal, but it's in rough shape. Thankfully it cash flows despite these challenges.

1. It can be expensive to trash a trailer if it's no longer repairable. (1-5k). The dumping fees can get expensive.

2. When evicting someone ensure that you know both the owner and occupant. I stayed an eviction and learned half way through that he didn't own it. Just amended the eviction to include both people.

3. Depending on the state certain fines that are accessed to the home owners will be passed to the park owner if unpaid.

I went and met everyone in this small town to get their take on the park (e.g. Police chief, town administrator, local mobile home store sales man)

Chris Ashley · Answer

Good insight Kevin, thank you. After reading your post I contacted a local septic company. They said they'd do an inspection for 100 dollars for first hour and 65 after that. Seems reasonable price to pay for peace of mind.

thanks again,

Chris-

NaDean Bowles · Answer

A client of mine owns a park a little smaller than this and they say the gold is in buying super cheap trailers, fixing them up, and then renting them out.  They make a profit on each typically within the first year.  They have a maintenance man who lives there for free in exchange for some work/some cash.  He fixes up all of the old trailers and also whatever little things come up with the tenants.

Be sure to check your city/county codes.  Some places are 'fading out' mobile home parks and will not allow a new mobile home in a vacant spot.

Kevin Schulte · Answer

im at work right now so cant crunch numbers but an immediate red flag is a septic system. Have you had it looked at? Details on that? Those things are NOT cheap to fix and you could find out it isnt even meant to be used for that many spaces

Matt Skog · Answer

Thanks, Jeffrey. The park owner is dealing with some legal issues related to some of the units that he tried to argue to the court, that he wasn't really selling some units, but had merely recorded them on the wrong documents. It's one of the reasons for this lowball offer in the first place. One of my co-workers paid a few years past what he was legally bound to on the Contract for Deed. The park owner has had some others go against his favor like that as well.

Jeffrey H. · Answer

@Matt Skog if this has 95 occupied pads and a lot rent of $475 per month then this park is worth closer to 2.75 or 3.0 Million on the surface or more as it sits.  95 Pads * 475 lot rent * 12 months * 0.6 (40% expense ratio) * 10 capitalization rate = ~ 3.25 MM

If you can pick it up for 1 Million then you why not just milk the thing as it sits for the perpetual income, why the redevelopment headache for a one time payoff?  If anything try to expand on the current model and get rid of the motel.  Look into adding additional lots, and confirm what you can do with the city before you close on the thing.

Rachel H. · Answer

Numbers only show one side of the picture. Unfortunately, most times this is the only side many investors see. You need to seek out the intangibles and see what issues have come up with the park (i.e. infrastructure, code violations, tenants' perception, etc).

Talking to tenants is one step in a good direction. I'd take it further and try to get invoices of past work done on the park. Talk to the contractors they used. They will tell you the issues that have come up in the past.

These are all intangibles which can help to make your decision. Good luck!

Matt Skog · Answer

I'm interested in a park near my work that is grandfathered in, which has a combination of a 10-unit motel-like efficiency, and around 100 lots with city water and sewer. I'm interested in turning it over into a high-end lakefront community, as it's situated on the lake as it is. Am I being too short-sighted in offering $1 million? Over half of the units are owner-financing. Plus lot rents are $475, and only 5% vacancy rate. The 10-unit rents are $500. If I were to develop the lake lots, they would go for $200,000 apiece, and could make 10-15 lots. Would appreciate your thoughts.

NaDean Bowles · Answer

I'm glad it's working out so far!

22 unit Mobile Home Park for 250K-Is this a good deal, advice?

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