Need Help Evaluating AZ MH Park with some RV Lots

[William Thorn]

I have an off market deal in AZ that I would like some more input on evaluating. The owner has terrible records and even if he did they wouldn’t be very helpful since he bought the park with only 4 mobile homes on it a few years ago so financials would obviously be of no use because he has brought in a bunch of homes.

-40 MH lots
-8 RV lots
-city water/sewer billed back to tenants
-individual gas/electric meters direct billed to tenant
-30 occupied MH’s with 22 of the homes with notes, lot rent $395
-3 RV’s on MH lots at $300, tenants pay all utilities
-8 RV’s with lot rent of $300, long term and tenants pay utilities
-7 vacant MH pads

Again, the seller has basically no financials. He is offering seller financing with $500,000 down and 4.5% interest rate and wants $1,900,000.

MH value= $395x30x12x.7= $99,540 NOI@ 7.5 cap is $1,327,000
RV value= $300x11x12x.5= $19,800 NOI @9.5 cap is $208,421
The homes according to him are valued at $10,000 each= $220,000

Questions:

1. 1.Would you use a higher expense ratio for the MH’s because its a smaller park?
2. 2.Being mostly homes with notes, how does that effect value?
3. 3.He said the notes are in compliance but I thought with the Dodd Frank and Safe act it wasn’t legal?
4. 4.Should I give him 75% of home value?
5. 5.How do I factor in the note income in my underwriting or just leave it out?
6. 6.Any other significant items to look at with this info?

Thank you

[Daniel Ryu]

@Jack Martin

That's good info to know.

@William Thorn

Notes and Home valuation - Sellers will tell you all sorts of things but I'd focus on your business model. All investments are priced on future cashflows. 

If the homes are on a note then the homes should be priced based on the remaining cashflows that the note generate - so not sure where the owner is getting $10K per home from? And yes, typically, those note are discounted. 

Generally, a cap rate to me is just a starting point. Ultimately I'm projecting based on an IRR with all projected cash inflows and outflows. If you set up an Excel model, you can then do different scenarios (either with goal seek) or just by manually changing your inputs to see how the returns look overall.

Since you're in the pre-contract stage, you can ask the Seller - 'what's your expense ratio?' If he tells you 30% then let him know, "that's what I'm offering based off." If you find out during Due Diligence that he lied, then that's a potentially a retradeable issue depending on the what you find with expenses.

Lastly with re: COVID 19 - how does future unemployment look in this area and for this park?

Just some thoughts - I hope they help. 

I also have a Youtube Channel where I talk about industry news - won't be anything specific to your questions, but there might be topics that be of interest. 

Best of luck!

@Robert Strohmeyer

10-12% caps are possible but not as likely in this market. If you're buying at those cap rates, then typically there less desirable for some reason (smaller, private utilities, more rural). Frank will tell you that in today's environment, the general market is around 6-8% caps. I did a future pricing expectations episode (episode 3) on my youtube channel - the owner's surveyed said they were expecting most deals to transact between 5-9% cap and that's fairly consistent with what I've seen in the marketplace.

Also, this is an extremely broad metric (meaning that it could differ greatly depending on region and how COVID 19 has affected the area), the owners surveyed were anticipating a 15-25% price drop as a result of everything going on.

I haven't actually heard prices dropping yet from the broker /owner / industry convos I've had - but it's something to think about as you try to price future purchases.