Opportunity or Money Pit?

Question

We have been presented with a pseudo mobile home park just outside of town by the college where we live. I'm enticed, it grosses (when full) $13k/month and appears to cash flow roughly $4k/month. The owner received an appraisal on pro forma stating $550k. But, when I crunch my numbers I come up with a ballpark value 'as-is' of $350k. The units are half MH and half SFH. There are 25 units and they all need a lot of work. He has them filled with a rough crowd aside from 7 empty units. I like the numbers, if I have the value right when looking at a MH. If we improved the property and filled them with a higher quality tenant, there is tremendous upside. I am skeptical on how to value 20-30 year old MH's. From an income approach without looking at the units, it would be valued higher than the appraisal, but there is ALOT of work needing to be done. Any tips? How do you value MH's? I have been reading and researching, but don't really have a strong hold on this.

Thanks!

Ryan Groene · Answer

Money pit, your better buying an apartment with maybe less units but for the same price in that college town, and you will end up managing it less/same because you still own the units, just like the MHP.  MHP's are really only efficient in that number of lots if they are either really high lots rent(great than 350 a month) and/or you run it like a horizontal apartment and just accept it as is.

Janene Tompkins · Answer

I would value old homes that need a lot of work at ZERO. Value the MHP on the basis of lot rent only. You will probably have to put in a minimum of $4000-$5000 per Home to bring them to any kind of decent living standard. I am speaking from experience. I bought a park with 20 park owned homes. They were “rehabbed” by the previous owner. I valued them at $5000/ each figuring that was the cost of moving and setting up a home. I wish I had given them a Zero. I just had to tear four of them down. We have rehabbed 8 others and it was a minimum of $4000 just to get them liveable. Meaning heat, floors that don’t have holes, operational bathrooms, electrical, etc. Okay, sorry for the rant. What I’m getting at is that home rent is usually a sunk cost. If you are renting out a mobile home, you will probably spend a lot on upkeep. Try to sell the homes to the resident, let them take care of the maintenance and you collect lot rent. Old homes are a money pit. Old homes with rough tenants are a money pit with a headache attached!

Edward B. · Answer

@Shea Spinelli, sounds like a money pit, but I wanted to throw out there just the same that there are lots of ways to calculate the value other than price. Owner financing can be very valuable and the deal may (MAY) make more sense with better terms from the seller. Less down, lower interest rate, interest only for a period of time, etc.

Point is that price is important, but it is not everything and it may be more important to him than you. I've seen sellers accept crazy terms to get their price (100% financing, 0% interest, no payments for the first year, etc.) However, sometimes a money pit is a money pit, no matter how you try to pretty it up.

Ingrid J. · Answer

@Shea Spinelli Many valid points have been made about the rehab issues, so I won't comment on that.

My question retains to the expense ratio of the park. If it's only netting 4 k in cash flow after expenses are paid, the question is why? Normally, as far as I know, MHPs should have an expense ratio of about 30-40 %, while the one you're considering is approximately 53 %. I would ask the current owner whether major costs like sewer/electrical have been submetered. If not, you could save a lot on installing submeters.

Shea Spinelli · Answer

@Janene Tompkins sounds like I may have the whole thing over valued. I hope your project turns a corner quick. I have a vision of a clean, quality MHP, but I may be valuing this too high based on what needs to be done. I think I’m going to walk away, unless I can get a substantial discount to rehab quickly. Thank you.

Natalie Schanne · Answer

@Shea Spinelli - the area has several foreclosures currently for sale on the block. It seems like any time one is sold and fixed up another one is destroyed by an uncaring tenant / owner and goes into foreclosure. So no, I don’t really predict revitalization or appreciation. For this property I’ve received at least 300 calls/emails/texts and nearly nobody over 600 credit score has applied. The only person with a 680 had a pitbull and came with 2 others to the showing but said she was the only occupant on the lease for a 4 bedroom 1 bathroom house. Sure. Property cashflows ok ($1500/mo rent on $60k purchase) assuming no damaging tenants.

Shea Spinelli · Answer

@Natalie Schanne sounds like one of those deals where you wish you could buy the whole block. Then you could improve it to the degree necessary. There’s some areas here that we could do the same. In the long run it would be very profitable and give families some quality housing.

Shea Spinelli · Answer

@Natalie Schanne I agree with the clean-up. It could take longer than that. He wants $500k, owner-financed for 20 years at 5.5% with 60k down. I think the least he’ll go is $450k. But, I can’t see him coming down another $100k unless it sits for  a while without interest. How long have you had your rental vacant for? Is it in a neighborhood that is headed for revitalization?

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