Mobile home analysis

[NA NA]

I need help with a first time mobile home park purchase. The deal in question is as follows:

http://www.loopnet.com/Listing/17416660

Some further details

7 tenant owned homes at $150 a month

1 at $200 a month

5 park owned homes

2 have been remodeled with tenants paying $550 each

3 vacant, said “need some rehab”

19 total pads.

On city sewer and water ($6000 a year bill, $50 per 10 rented, covers water bill annually)

What do you guys think?

[Jack Martin]

@NA NA Several items jump out immediately.  First of all, the gross income includes rental income from POHs, so if your goal is to sell the homes and eventually have 100% resident owned homes, then you should be discounting the gross income to only include lot rent.   Second, the expenses demonstrated are only 21% of gross which is a complete pipe dream unless you live onsite and do all the management and maintenance yourself.  On a park like this the expenses will run at a minimum of 35%-40%, especially considering you have high vacancy and park owned rentals. Third, there are 9 spaces not currently earning any income, so there is a lot of work ahead of you to remedy that.  You should only be paying for the lot income that is coming off the 10 spaces that are occupied and paying rent, with a realistic expense ratio, against a fair market cap rate.  I think you can make a deal out of this, but IMO it is overpriced. 

Also, I agree with Dan on the demand analysis.  Anytime you will be filling vacant spaces or selling POHs, the most important task to perform prior to acquiring a park is a thorough market demand study. DEMAND is the foundation of your pro forma, so don't shortcut the process. It is not that difficult if you are diligent.

Here are the simple steps to uncover the reality about demand:

• Start with the apartments in the area. Call them and ask how much a 2 bedroom apartment is. It should be at least double the lot rent at a mobile home park in the same neighborhood. Then ask how many vacant units there are to choose from. If you find that the apartments have a low vacancy, that is a good sign. If you find high vacancy, that is another red flag for the market and you should be cautious. You should always consider apartments as an option for your prospective tenant, because if it costs them more to make payments on the mobile home plus pay the lot rent, they might just rent an apartment instead. Most people might miss this little nugget, but it is a quick way to determine the lack of demand and where lot rent should be in the market.

• Next, call the parks within 5-10 miles that are similar parks. Ask them what their current lot rent is and what else is included/excluded? Ask if they have any rentals in the park and how much those rent for. Ask them if they have any homes for sale in the park and what the details are, and how many homes have sold recently. Do they finance? How much do they require down? What kind of credit do they require? Ask them if there are any vacant spaces in the park and what incentives would they offer if you brought your own home into the park. From those calls, you will have learned what your competition is related to lot rent, the sale of homes, how many POH they have, and what incentives you may have to offer as you sell homes.

• Next, you can advertise a home for sale yourself as a "test ad". Place ads on every platform you can where home buyers could be looking for an inexpensive home. The goal of these test ads are simply to find out how much interest there is in the market for the homes you will be selling once you purchase the park. Make sure to advertise in all the available channels you can find so you can perform a true test. (craigslist, FSBO, zillow, etc. as well as placing signs on the street corners in the area) You should be receiving a high volume of calls (I like to see 20 calls a week) if you expect to fill a high amount of vacancy at a park. Any less than that could be another red flag.

Take the time to do this right and you will be glad you did.  If you get positive signs from all those efforts, then it's possible the previous owner was simply neglecting the park and you could have a good opportunity on your hands. Remember, filling vacant spaces and selling POHs is all about market demand. Make sure it is there or you'll end up wishing you had never bought the park.

All the best, 

Jack