Mobile home park valuation

[Robert Fletcher]

I am looking at purchasing a mobile home park from a friends father who is older. . It is run down due to his age. This is the situation there are 40 lots, he owns two of the trailers only 10 lots leased he is getting $150 per lot. There is a moratorium on mobile home lots in the area but I have already verified with planning and zoning his is grandfathered in. A 20 mile radius the range is 185-225 per lot water garbage included. Rent for park owned trailers very depending on condition of community and trailer 675-$850 per month including lot fee.  Nicer communities at about avg 80% occupancy really nice are full. Moratorium is now 2 mobile homes per one acre. 

It needs road repair about $7-9,000.00 (depending on fill/gravel, speed bumps), new entrance , landscaping, school bus/ mail box covered area $8-9,000.00, upgrade electric boxes and poles $12,000.00, add city water $3,000.00, new pumps for sewage plant $3,000.00.  About $40,000.00 upgrades and redeveloping costs. I am a contractor and can do work.

Projected Yearly costs

property taxes once bought $6,000.00

Insurance.  $2,500.00

Maintainace grass landscape. $6,000.00

Self Management 

Based on this general information what would the mobile home experts say a fair purchase valuation be and also I would like to purchase around 10-15 mobile homes to set a general standard. Any advise on this also.

Thanks for your help,

Robert

[JC K.]

Not an expert, but assuming you have 2 Park Owned Homes (POH) and 10 Park Owned Homes (TOH) and picking the low range on rents you'd end up somewhere between $160K and $180K using some of the standard rules of thumb.  This ignores upgrade/redevelopment costs you are considering.  By the time you do a return on cash analysis you may be unwilling to offer that much.

I suspect the seller will think you are WAY TOO LOW in either case.  So this is where you really want to start brainstorming for win-win ideas.  If you haven't researched the "Master Lease Option" (lease to own) you may want to do that now.  There are many reasons why this may be a good solution for both of you.  

For you, this allows you to keep your cash to invest into the park and start increasing NOI. The park's valuation will increase about $10K for each $1K of NOI increase and you get to keep that when you close.

For the seller, this allows him to realize a better sale price for the property than he would get at current valuations and he gets rid of the headache immediately.

The theory is that you would re-finance the park in a few years and would be able to pay the seller a higher price than valuation shows and at closing you would own a park that is worth a lot more than what you paid for.  You may even be able to get your cash out of the deal.

If you decide to go in this direction, you may want to easy into it. First you have to let the Seller realize the low NOI will drive a low park valuation. At some point you'll have to convince the seller that he is taking little to no risk because you are trustworthy, you are capable, you have a plan, etc. In the event you fail to make payments, then the seller ends up with a slightly improved property. Thus, in theory this arrangement presents very little risk for the seller, provided the contract is drafted properly.