Jacksonville Deal Analysis (in due diligence)

[Elihu Bogan]

Hi BP! Long time reader, first time poster. I have a deal under contract that goes against most of what I've been taught from Frank & Dave, Jefferson Lilly and the other experts, but I can't shake it so I'd like someone to talk me out of it before due diligence closes in a week. The offer was well moer than I'd been taught to put out there, but some podcast somewhere did say 'when it doubt, get it under contract.' :) Without further ado, here are the numbers (I'm sure I'm missing something vital and will update as needed):

- Westside Jax (32244), Wal-Mart supercenter 2.5mi, 60k zip population, MSA 1.3 million population

- Unemployment 6%, Median home price $85-110k (border of two areas), median income $55k

- Rent for 2BR $970/mo, vacancy rate 10%

- $315k contract price, $65k seller carry @ 3.5% interest-only, 5yr balloon.

- 21 units, 1 unit $200 lot rent. Avg. for area is $250+ lot rent.

- 13 POH occupied at avg $550/mo ($6700/mo after collection losses)

- 40% expense ratio (after-purchase)

- Homes are all pre-HUD and not well kept up. 8 vacants are total guts or replace.

- Vacancies due to (extreme) neglect and negligence/deferred maintenance, not lack of demand. 

- Large lots (5 acres = 1/8 acre each + recreation space)

- city water and septic, sewer available right outside.

So, the rule of thumb is 14 units rented @ $200 lot rent * 12 mos * 50% expense ratio * 10 cap = $168k. Fully occupied would be 22 * 200 * 12 * 50% * 10cap=$260k lot rent only. Land appraised last year for a land-loan at $220k. Contract price is $315k, there are multiple cash backups going up to $350k at this point (for some reason, it's harder to walk away when you know there are other people willing to pay more...)

Now, I'm not foolish enough to capitalize the value of the homes, but any appraiser will tell you there is an income approach that will assign value to something that generates rents regardless of what it's made out of. By renovating the vacants (say another $100k including needed park fixes), I am confident I can get the rent roll to $10-12k with $415k out of pocket. At $150k, I can bring in 10 'new' trailers that would be probably preferred to 'polishing a turd' as my father would say. That puts me at $465k stabilized with $10k rents, which at the bottom of my spreadsheet works out to $6500/mo before financing, or about a 17-cap. Also hits 2.2% gross cash flow, which is the first time I've seen 2% plus on something over $50k around here.

Happy to update with missing details, please do not flame with anti-POH rhetoric, etc. I know this is not a cookie-cutter deal, it's just really high vacancy for a correctable reason.

[Elihu Bogan]

@Ken Rishel good point about the bidding war - I've heard horror stories about what happened at the end of the MH financing book in the late-90s, early-00s. I definitely wouldn't raise my offer from where it is - I even asked the broker if I could flip the contract somehow for the $35k spread, but they didn't seem too keen on the idea :)