Mobile Home Park Evaluation & Due Diligence

[Ben Walsh]

Hi All, 

I am looking at a few mobile home parks in MN and I am wondering what you all use for evaluating the value of a prospective mobile home park. Are you evaluating it the way you would an apartment building? Would anyone be willing to share a calculator or spread sheet that they use? 

I am also wanting to make sure that I have a good due diligence check list, would anyone be willing to share what they use for their due diligence on a mobile home park? 

I appreciate any and all help with this, and if anyone is the Twin Cities area of MN and wants to meet up I am always open to that! 

[Jack Martin]

@Ben Walsh although MHPs might look like a cousin to apartments, they are quite a bit different. To properly value a park requires a fairly deep understanding of how they will operate, given all the potential variables. Some of those variables are the size of the park, number of vacant spaces, number of POHs, number of vacant POHs, number of MH spaces, number of RV spaces, the park amenities, the age of the park, underground infrastructure age and condition, park location, size of the market, value of SFR in the market, water or well, sewer or septic, other utility sources and whether or not they are direct billed, deferred maintenance, cost of management, and more.

However, there is a basic "back of the napkin" evaluation that will usually tell you if the deal is worth a closer look. Similar to other commercial real estate, that formula is the NOI times a market cap rate. On a park, you can calculate the NOI by multiplying the number of spaces occupied by the lot rent, and then multiply by 12 months, subtract the expenses (can range from 35-50%, that % depending on the variables above). Once you have the NOI, divide the NOI by the market cap rate (in today's market conditions, the cap rate will likely land between 6% and 9%, depending on the market you are in. So if you are in a 7% cap rate market, you would divide the NOI by .07 and that would give you the value of the asset.

That valuation will tell you if the price expectation from the seller is in range or not. If it is close, then it deserves a closer look. If it is way off, you will need to understand why. There are cases where other income from laundry, a C-store, a restaurant, or something like that deserves additional evaluation, so make sure not to punt before you understand additional income. Also, there are cases where the expenses will be higher, particularly in an RV park that has a large amenity package and daily RV traffic.  

As it relates to due diligence, we look at over 100 items during the inspection period, but again, many of those items require a fairly deep understanding of how the park will operate, given all the potential variables mentioned above. To highlight the basics of DD, we like to break those up into 4 areas:  Financials, initial walkthrough, contractor inspections, and compliance.  

Review of the financials is easiest when the current owner has kept the books correctly, which is not often the case.  But with experience, it is pretty easy to understand how the park should be running and see if what the seller has shared lines up.  This is also where you can begin to see where there are operational inefficiencies, cost overruns, or areas where income can be improved. 

The initial walkthrough we do includes confirming the number of spaces, the general condition of the utilities at each space, the status of the home on each space (POH, TOH, vacant, RV, etc.) and the condition of the rest of the park and amenities (roads, clubhouse, office, pool, etc).  We also sit down with the onsite manager and go through the financials related to their role of running the park (collecting rent, problem tenants, sales of homes, marketing efforts, recurring maintenance items, problem areas in the park infrastructure, etc) If we don't find any deal killers during our initial walkthrough, then it makes sense to schedule contractors to do formal inspections. 

The contractor inspections always include electrical, plumbing, and septic/sewer (to address the underground infrastructure) but also can include pool, home inspections, asphalt, and more, depending on the park.  The goal is to always work with a contractor who is familiar with parks.  That is not always easy to find, but trust me, it is worth making 100 calls to find the right contractor who works in the park space and understands them.  When you meet with the contractors, make sure to understand what you have, what will be required to repair and maintain what you have, and what you should be budgeting for future capital improvements, if needed. 

The compliance portion of our DD includes everything related to city, county, and state compliance to continue to run the property as a park.  That includes zoning, building, permits, sales tax, licensing, and more.  In addition to that, we like to check with the police, fire, insurance, sex offender status, and anything that might affect the operations of the park. The goal is to avoid surprises, understand what challenges may be present, and what impact the results of inspections may have on our operations of the park. 

Alongside our inspections, we are putting together the strategy for the park, running our test marketing to understand the demand in the market, and creating the budget for the project.  

All the best, 

Jack