MHP valuation. Please help me analyze this deal

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MHP valuation. Please help me analyze this deal

Steven Lalonde
Castlegar BC, British Columbia · Member since 2017 · 18 posts · 0 votes

Hi BP community,

I am analyzing and collecting info on a small MHP in my area that I am interested in. Im asking for your help and advice on this deal.

The park is on 7 acres, currently has 12 pads, all tenant owned, $375/month pad rent, tenants do own yard work and maintenance, tenant pays for electric, owner pays for water/sewer/garbage/roads. On the property is also a large house. My family would move into this house, and potential to have a 3bed basement suite, $1600/month including utilities. As of now, the current owner splits the income 50/50, residential/commercial, so the expenses for the MHP are essentially 50% (if that is right?).

Water is a community system, no well. Sewer is x4 septics, one of those is for the house. The owner has been pumping the tanks every 4 years, one a year. There is potential to install water meters for each pad, and bill back water to the tenants. Park is on a paved road, road needs maintenance or full repair. I am looking into expansion potential. I am assuming I could get 6-8 more pads on the property, just due to the layout of the current park. I am budgeting $15,000 for each lot creation. RV or tiny homes are of interest to me as well. Potential to have a fenced RV storage or a mini storage. Estimation $600/month for income, maybe more.

Asking price is $950,000. The owners 50/50 income split, would mean they think the MHP is $475,000 and the house is $475,000. In my opinion, overhead map, the split could easily be 20/80, residential/commercial, especially if the expansion goes through.

Comparables of just single family houses in the area are selling for the $400,000 range. The house on the property is pretty decent. A large deck would need to have vinyl decking replace. There is a large in ground pool that is fully fenced and in good shape. I would be ok to pay in the $400,000 range for the house and the land it is on. The park, according my valuation is not worth the owners asking price of $475,000.

Owner provided their income/expenses:

$950,000 asking price

$54,000/year pad rents

11,000/year expenses for whole property (prop tax, insurance, water and garbage. Owner did not include any septic maintenance or other park maintenance, so I dont think this is fully accurate.

Based on owners 50/50 and income/expenses, they say their NOI is $49,000/year with a 10% cap. This only includes the 12 pad rents and not income on the house or RV storage.

I was hoping for some help evaluating this property. If you need more info, I would be glad to provide that.

Thanks,

Steve

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  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    6y

    The MHP is small. For this size of property, I think you'd want at least a 7-8% cap. NOI of $49K on $54K lot rent is completely bogus. The average MHP exp/rev ratio is closer to 40%, meaning your NOI is probably closer to $32,400. You can probably confirm this by going back further than the TTM. On a 7% cap, that's $463K, so $475K estimate is close, but on the high end IMO. A good outcome for you would be at an 8% cap, closer to $405K.

    If you think the $400K house valuation is accurate, $805K sale price is a really good outcome for you, and somewhere between $850K and $900K being closer to a fair value depending on how you value the house.  Good luck!

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  • Steven Lalonde
    OP
    Castlegar BC, British Columbia · Member since 2017 · 18 posts · 0 votes
    6y

    Hi Frank,

    I appreciate your reply.

    Im mostly confused why or how the seller justifies this property a 50/50 residential/commercial to calculate expenses. 12 pads and 1 house. Even if I lived in the house, there is still 12 pad units paying 12 expenses, if that make sense. Is it because they value the house at $475,000?

    I found out today, the house has two septics, the park has 3.

    Water and garbage annual payment is $5800. Seller is saying that $2900 is for park and $2900 is for the house. This does not seem right to me. Seller is basing all expenses like this.

    Seller is saying NOI is ($54,000 - $6500 (half of $11,000 full expenses) = $47,500) based the park being split 50/50, their value for park alone is $475,000. That makes their cap rate at 10%.

    How much really does the house factor into all of this, it cant be 50%. Should I then base the cap rate on the full property value of $950,000? That would result in a cap of 5%.

    Im not sure how to proceed and how to value this property correctly. Any more help is greatly appreciated.

    Steve

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  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    6y
    Originally posted by @Steven Lalonde:

    How much really does the house factor into all of this, it cant be 50%. Should I then base the cap rate on the full property value of $950,000? That would result in a cap of 5%.

    This is an odd one.  I agree with you that cutting every cost in half and saying "that half's for the house" is completely bogus.  I think the best way to continue valuation is to add revenue and expenses from the house as if it were a rental and then add in all expenses, that way you get a full P&L picture and it negates the weird game the seller's trying to play with the expenses. So you would produce a proforma P&L that looks like this:

    Revenue

    - Revenue from house

    - MHP Revenue

    Expenses

    - House-only expenses

    - MHP-only expenses

    - Communal expenses

    Then you can figure your cap rate based off the entire property.  Be mindful to accrue for future replacement of all those septic tanks.  Those things aren't cheap.

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