How to analyze parks with all POH’s?

[Will Graham]

I'm curious if anyone has good suggestions for evaluating the current value of a park that contains all park owned homes. How do you evaluate what the lot rent would be so that you can arrive at an estimated NOI? Do you just look up surrounding lot rents at other parks?

[Mike G.]

@Will Graham 

Of course, park-owned home income is income. But the problem is in how you value that income. If you look at a business to buy through a business broker, the going rate is 2 to 5 times net income (20% cap rate to 50% cap rate). A 10% cap rate is reserved only for real estate – and the homes are not real estate, but only personal property. So if you apply a 30% cap rate on the park-owned home income, then here’s what the value of the homes would be under your scenario:$650 home rent minus $250 lot rent minus $100 in property tax, insurance and repairs = $300 in rent x 12 months = $3,600. At a 30% cap rate, that values the home at around $12,000, which may be reasonable in some markets. At a 10% cap rate, the value is $36,000, which is obviously insane. When we sell our own parks, we only value the homes at what a home is worth, not as a function of the rent, because we know that capping home rent at 10% is not reasonable for the buyer. But the easier demonstration is if I turn the table and offer you the ability, right now, to buy any of the mobile homes in any of our communities at a 10% cap rate. Would you do it? If so, we’d be happy to sell you as many as you can afford. To date, we have never had a taker on that offer (although we’re still looking).So the moral is that it’s not the income that’s the problem in valuing park-owed homes, it’s the cap rate that is used.

A mobile home is a depreciating asset, while land is not (there is not even a depreciation schedule for land under the IRS rules). While mobile homes will last indefinitely, over time the home becomes unattractive in both condition and floorplan. We have found that most mobile homes end up being worth around $1,000 when they get to be 40 years old or so (such as 1970’s mobile homes today) as just basic shelter, just the same as all pickup trucks become worth around $1,000 as long as they’re running, since you have to use them to haul lumber, etc. if you are a contractor.The goal of all park owners is to pass the baton of the home from the park to the tenant – as fast as possible. So that income on the home will ultimately go away (even if it’s 10+ years from now). Since the income will go to zero on the home ultimately, you can’t put 10% cap debt on it. However, the income on the land never goes away, and actually increases over time, so it can handle a 10% cap rate or even lower in some cases.The sophisticated bank lenders and appraisers figured this out decades ago, which is why they will not put any value on the homes.If you feel that the homes are of special value, then keep the homes and sell the park, and pay lot rent on the homes until you have derived your value goal from them.