Help me analyze this deal... please?

[Jonathan Hayek]

Hi folks - 

Long time lurker, but infrequent poster. I'm learning about HMPs, and would love for you to chime in on this deal. 

Price: $795,000
Community Type: All ages
Number of Lots: 22
Current Occupancy: 86% (19 Mobile Homes) 2 vacant lots, one unit in the process of being certified 
Average MH Lot Rent: (Tenant Owned) $325
Average MH Rent: (Rental Units) $768.75
Animal Fees: $25 Per Dog: Current revenue from Dog Fees is $300 a month.
Size: 4.24 Acres
Gross Income: $98,400 + $3,600 (Dog Fees) = $102,000
Current Monthly Rent Roll: $8,200

Market Cap Rate: 7.8%

The seller also says there is an additional undeveloped half acre that could be used for additional homes (8) or RV/ boat storage, etc.. County sewer and water. Tenants are billed back via RUBS and 90% of utility costs are recouped. Electric and gas are billed directly to tenants. 

What do you like? What red flags do you see? Thanks! 

[Frank Rolfe]

The formula on this park would be 19 x $325 x 12 x .7 = NOI of $51,870 which, at a sales price of $795,000 is a cap rate of 6.5% and not the stated 7.8%. The seller is trying to pass off the "dog fees" and rental home income as "real property" income, which it is not. No appraiser is going to agree those additions. At a cap rate of 6.5%, this deal is not that attractive. But there could be additional items that could alter this view, the biggest being the ability to push the rents up significantly if the market rates are much higher, or the seller offering insanely great seller financing terms coupled with the ability to push rents aggressively in keeping with market forces.

But if $325 is near the market rent, and there's no seller carry, this deal is dead in the water. It would not be bankable at that price because it will not even make the appraisal and will not meet the coverage ratio on the debt more than likely.

The extra land to expand story is as old as the industry has been around, and means nothing without an actual permit to build in hand, and even then you will need to price it out (around $20,000 per lot plus land cots plus tap fees and engineering).

I would price this deal more at around $550,000, which is a win/win for both buyer and seller (assuming you can still push rents based on market). At $795,000 only the seller gets a win.