How would you value this park

[Will G.]

Hi all,

I wold love some feedback valuation on a small park i am considering;

9 spaces on 4.25 acres outside city limits, 

3 tenant owned homes with lot rent @ $160(below current market of $250)

3 park owned singlewide homes @$500

1 park owned doublewide@ $650

2 park owned singles that are vacant and terrible condition

Monthly gross is $2630 currently

Tenants pay water via seperate meters and on septic

Is there a standardized expense ratio for the lot only rents?

Thanks

[Bill F.]

@Will G. You should not include the rental portion of the POH (that is any income above the lot rent). I view a MHP with POH as two separate business, even if the owner does not. First they have the MHP, which rents out pads to people with MHs. Second, they own a bunch of rentals, which they have chosen to place in this particular park. 

1. Generally speaking, including rental income leads you to over value the homes and pay to much for the park.  Using your offer price and the number I came up with for the park at full occupancy ($110k) as an example, you would pay $102k for six trailers. now assuming the double wide is worth twice a single (for the sake of argument) The single wides are worth $14.5k and the double $29k. I haven't seen the MHs, but most I know that are selling for $14 are at last habitable. Also remember, that's assuming the park is full, which it isn't, so that lowers the value of the park and thus increase the amount you are paying for the MHs. 

2. You capture the rental income when, or if, you buy the trailers. This is no different than a SFR. You have this rental, its in this condition, Comps tell me its worth this much. Easy day.

Thinking about it another way:

If I owned those rentals in this park, would you count my rental income as part of the park's profit? No way.

Now if you tell all of this to the seller he/she could say something like, "well the rents could be raised to $200, you can fix up the other two MHs", or a few other helpful ideas that will raise the NOI and thus the value of the park. My first question is, "if its so easy, why haven't you done it?"

There are two schools of thought on paying for the opportunity to add value to a park. First is: pay for what you have now and not the potential. That is valid business logic and you won't go wrong following it, but can lead you to sometimes pass on value add opportunities. Other time it can keep you from buying a loser. The other is to include potential future cash flows, which it seems like you have done with your offer price. With this method you'd included, for example, the rental increase or infilling the park, into your cash flows, BUT you have to use an increased Cap Rate to reward yourself for the time, capital, and skill you will use to do this. Instead of buying at a 10 cap you'd go to a 12 or 13. What you don't want to do is include potential and pay the same cap rate. 

Also, you want to make sure that any improvement's adds more value than it costs to the park.  Lets say you need to spend $30k to bring a new home (MH cost, moving cost, site prep, advertising, management time...) at $250 lot rent,a 45% expense ratio, and a 10 Cap, this will add $16,500 in value to the park and will take about 8 years for you to get paid back; even more if you paid for the potential to fill the lot in your purchase price. Not saying you shouldn't add a home in this case, but just make sure that doing so fits within your long term strategy for the park.