How do you value RTO income?

Question

Hello,

I'm curious how investors value/underwrite parks where there is a component of RTO? For example: Let's assume there is a Mobile Home Park for sale with 10 homes in the park, site rent $200 (all utilities billed direct to resident). 9 homes are straight resident owned with 1 home on RTO contract. Let's assume that the RTO just began and they have all 24 months left in their payment schedule.

RTO Contract:

- Deposit: $3,000

- PMT = $500/month

- Term = 24 Months

Park Financials:

- Income = ($200 * 10 * 12) = $24,000

- Expenses = ($24,000 * 0.25) = $6,000

- NOI = $18,000

- Cap rate = 10%

- Total Value = $180,000

If you are buying this park between the time that the RTO paid their deposit and the time that they make their first PMT (resident has 24 months left in term w/ remaining balance of $12,000), how do you adjust the total value/purchase price for the RTO contract? Would this be a dollar for dollar increase to purchase price? (E.g. $180,000 + $3,000 deposit + $12,000 remaining balance = $195,000)

Daniel Smithson · Answer

The best way to value a MH is through local comps - start with other parks, FB and CL. Make sure you filter for homes that do not have to be moved as that always discounts the sales price heavily. I'd also stay away from national sources like NADA as the value of a MH can vary widely - a $2k home in rural AL could be $100k in the right market in CA. Location still matters, even with something that's semi-mobile. MHVillage is actually a good place for comps for retail sales - not a great source for buying for infill though!

@David Denzy - you're spot on. Always go with the lower of the values, and discount it some from there if possible. You can always try to separate the home from the park package if the seller is set on a high price and let them sell it separately. If that doesn't work, I wouldn't lose sight of the forest for a tree. One slightly overpriced home shouldn't sink a deal if it's a decent deal. If your margin is that tight, you probably have other underwriting issues you need to review. Also, you can always do a straight rental for a year or two, get your money back, and then sell it for its value at that point.

Of course, all of this assumes the home title is free-and-clear. If not, that's a whole other can of worms to deal with.

@Leslie A. - nothing has really changed with the RTO laws. It's been reviewed by a bunch of lawyers who have developed what is, in their opinion, a legal workaround of sorts. There are two systems most people use - a lease with option to purchase and a MH industry-exclusive rent credit system. Both systems do not allow the buyer to accrue equity in the home as is typical with a true note. With the LO, the home depreciates over time so it becomes more affordable. With the RC, the buyer accumulates credits to eventually be "awarded" the home, not unlike a retail loyalty program. We've used both, but find the management of the LO program to be much easier. I'd consult a lawyer before using either system though.

We still advertise as "rent to own" because that's the verbiage our clientele are used to seeing, but we utilize these systems as our lease and purchase agreement documents. You can imagine the looks I've gotten trying to explain Dodd-Frank and the SAFE act to someone asking if we rent to own. Haha!

Leslie A. · Answer

@David Denzy

My impression is that NADA shows a higher value than what you could sell it for. Again, this is my old knowledge. Don’t know how it is now.  Wouldn’t hurt to have a look.

I think you’d get a more accurate picture by looking at for sale ads and how fast the homes are selling.

Daniel Smithson · Answer

Just my $02 - I'm with @Leslie A. on this one. Since the RTO agreement is so new, even with the higher deposit, I would significantly discount it. There's still probably a 50% default rate on these types of agreements because the buyers who use them typically have terrible credit and payment histories. Ideally, you'll underwrite the value of the home as if you had to resell it later, much like you would a house flip.

Also, keep in mind that there is no obligation for the buyer to buy the home in an RTO agreement (rent credit or lease option) since it's not technically a mortgage-lender originated note. Also double-check the insurance and taxes as you'll often be required to pay these on the home until the title changes hands. The buyer may have agreed to pay these separately, but they need to go through you to ensure they do get paid.

Best of luck!

Leslie A. · Answer

I just saw your other post about the competitive market.

If paying more for the note gives you an edge to get an otherwise great park, it would be worth it.

Leslie A. · Answer

You’re very welcome!  Forgive me for being very rusty on the subject. I’ve been inactive for several years. But yes, you are right. The higher down payment note would be worth much more than the lower down payment note. How much to value a note is a subjective matter. And in general, a mobile home note is much less valuable than a note on real estate. I’m not sure where you could find more concrete guidance. There’s a Note forum here. I don’t know if it has anything on mobile homes. I kind of doubt it. Hopefully someone more helpful will respond to this thread. As in all negotiation, pay as little as you can.

Leslie A. · Answer

No it wouldn’t. This is basically an unseasoned note and you should buy it at a significant discount.   I would try to get it for 50% of the balance owed. I might pay up to 60%

Leslie A. · Answer

@Daniel Smithson. Thanks so much for explaining this. I really appreciate it!

Leslie A. · Answer

Ahh. Happy to help and thanks for the upvotes!

Facebook and Craigslist. Last time I looked at MH Village prices they were high retail, so don’t go by that.

Btw, what kind of MH is this?  Year, size, etc?

David Denzy · Answer

Okay, thank you so much for helping me out. I'm trying to give you upvotes whenever possible to return the favor, haha.

Follow up question: what are your sources for "for sale ads"? Facebook? MHVillage?

David Denzy · Answer

And how do you do that? I know quite a bit about the market for Mobile Home Parks, but i know little about the market for mobile homes themselves. Has anyone had a good/accurate experience using NADA?

How do you value RTO income?

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