MHP Deal or No Deal?

Question

I am contemplating putting an offer on an MHP.  I am hoping to get some expert opinions here on Bigger Pockets.

The asking price is $600,000.  24 pads.  17 – POH, 6 – TOH and 1 vacancy.

Lot rent is $200.  The rent from the POHs is between $300 and $800.

The park is on city water and city sewer.   It is individually metered for electricity.

The expenses listed annually are $28,773. This includes taxes, insurance, lawn care and maintenance.

The asking price seems high to me.   Does anybody think this deal could work?

Paul Moore · Answer

Hi @Greg McClain. Rather than help with the math, I would like to recommend that... if you are new... to find a coach/mentor and read a few books on the topic. Not to be insulting. I have a podcast called "How to Lose Money" and I have personally seen and jumped into way too many deals that I knew far too little about. (That may not be you!) Or bring in a partner or consultant who can look over your shoulder.

It sounds like it is in the range of a 5-cap, which is pricey for small deals like that. I am not counting the value or cash flow from the park-owned homes, and they certainly have some value which will help.  Good luck on this - let us know what you decide!

Daniel Smithson · Answer

I calculated out about the same CAP rate as @Paul Moore which is high for a smaller park like this. Always look at it through the eyes of a lender and what kind of terms you can get on the deal.

What are the market lot rents in that area? I assume they're higher than $200 unless it's a very rural area. Sometimes it's good to look at the end potential of a deal and see if the spread is worth it to you. It's not ideal to pay for unrealized upside, but in the competitive arena that is real estate today, you have to be willing to be flexible sometimes. Of course, that also means your underwriting has to be even stricter which means knowing the asset class right side up and upside down.

Chris Kelch · Answer

The rough way to get your starting point on value is to multiply 23 (occupied pads) * $200 (lot rent) * 12 (months) * (1 - 0.3 (rough expense ratio for park w city water/sewage)) / .085 (cap rate)  = 454K. You get the cap rate in that by figuring out what cash on cash return you want, and working backwards from that and % interest on the loan. If this number comes in close to ask you can figure out what value you want to assign to park owned homes. Echoing the other points in this thread asking price is probably too high esp for a smaller park like this. There's also too many park owned homes

Jack Martin · Answer

@Greg McClain that looks to be about a 5cap deal as mentioned above, and I would agree with the comments that this deal will require some effort to turn into a stabilize cash machine.  However, I would suggest you visit with the seller to share some perspective that may garner you a better price, and then do some market research to determine what the value could be when you are done.

It is highly likely that the reason for the 600k pricing is that the seller is capitalizing the rental income from the POHs. If you take the time to articulate to the seller that you intend to convert the POHs to TOHs and therefore all that income will be going away, the seller may see your point and accommodate you with a lower price.

Next, do some market research by calling/visiting all the parks in the area to see what they look like, how many POHs they have, and what the lot rents are. If you discover that lot rents are significantly higher than the $200 this park is currently getting, this might be a diamond in the rough. However, if you discover the rents in the area are the same, and the number of POHs at other parks are high, then that is a HUGE red flag and you should go look for another deal. Low lot rent and high POH numbers at all the parks in an area tells you that there is not enough demand to sell homes, or that the type of people that live in the area cannot afford to buy one.

However, let's say you do that research and discover this park is the only one with a high number of POHs and the market lot rent is actually $350 per month. Fast forward to when you are done selling the POHs and filling the vacant space, you will have 24 lots times an extra $150 per month, which results in over $43,000 of added top line NOI.

And if your chat with the seller nets you a price reduction to $450k, you will have turned a 5 cap deal into a 12-14cap deal (depending on your capex and stabilized expenses) That would be a deal worth wrestling, especially if it is in your backyard.

Have the conversation with the owner, and go do your research.  That will tell you to move on, or to roll up your sleeves and get excited.

All the best,

Jack

Daniel Smithson · Answer

@John Erlanger - I don't think either of us were insinuating what the market value would be as we don't have that information. It's quite easy to look at the numbers provided and back into what the capitalization rate would be on the asking price of the real estate. It's just a comparison metric to boil down net income vs price. The OP's job is to compare that number to where the market CAP rates are for comparable properties and negotiate from there.

My only point was that the asking price seems high based on the size of the deal, current income, and potential of the real estate. There are obviously more factors that go into underwriting a deal.

Greg McClain · Answer

Thank you @Jack Martin.  I appreciate the detailed response and the valuable information.  I will follow your advise and have a conversation with the seller.  I will let you know how the talk goes.

Greg McClain · Answer

Thanks @Chris Kelch, Thank you for breaking that down for me.

Greg McClain · Answer

Thank you @Daniel Smithson,  I appreciate the information and the encouragement.

Greg McClain · Answer

Thank you @Paul Moore for the honest words and advice.  I guess it is obvious that I am new to this.  I will listen to your podcast this afternoon.

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