Determining Offer on MHP

[Bryan H.]

I'm looking at purchasing a MHP, asking price is $220,000 with CAP rate = 12%. With 25% down and after expenses my ROI is about 21%.

I'm pretty sure the seller determined the price by starting with the CAP rate to get to $220,000.

Another way Frank Rolfe suggests is:
Rents x 12 x 70 = Purchase price. So $2850 x 12 x 70 = $192,500

Sitting in my local REIA meeting yesterday, the speaker said properties in the area are selling on average 5% less than tax values.
Tax value on this property is $187,000 - 5% = $177,650

How would you go about determining an offer price?

[Josh McCullough]

I would make an offer based on current income, how frank does it. It's the only sure fire way to succeed. There is a lot to be said for owner financing though, and I'd be willing to pay a little bit more in that instance. Of course, it would be nice to buy at that 5% below. I think an offer of 177k would turn the seller off pretty quick.

[John Vashon]

Bryan, what are your goals and plan for the park? Are the rents low and can they be increased? Where are the expenses and are they above the norm?

[Bryan H.]

Hi John Vashon Right now, everything I do in real estate is planning for the long term. My goals for the park would be to maintain the park, keep the tenants satisfied and enjoy years of cash flow. I would use that cash to either payoff the park or reinvest in other real estate.

Depending on the market, I plan to increase monthly rents $5-$10 each year. The current rents are fair and can be increased with the next lease renewal.

Expenses are pretty low. Its on city water with separate meters. It does have septic which requires maintenance. There is a little bit of grass to be mowed and a gazebo that needs power washing & staining. The homes are all tenant owned, no rentals. Its a small park but 11 of 12 lots are filled.

What are your thoughts?

[J Scott]

I would treat it like any other income generating asset -- do a pro-forma to evaluate your NOI, and determine a price based on the returns you're looking for.

[John Vashon]

In response to your initial question, J Scott "hit the nail", build the pro-forma and determine price. Have you written out buying criteria? If the property is good fit, as a long term hold, price might not be your primary criteria. I prefer under-managed parks with upside. This involves simple improvements, resolving problem tenants and then raising rents and reducing expenses.

[Andrew Bosworth]

Bryan, 

A year later...  What offer price did you decide on?  Did you get property?