How to Evaluate Mobile Home Park with Unlivable Trailers

[Andrew Yu]

Came across a potential MHP deal lately. It has about 8 to 10 park owned trailers. But they are not livable any more. Utilities are there though. My questions is how to underwrite the value of this MHP? Is it just land value now? Roughly about 1 acre inside city limit. 

[Jack Martin]

@Andrew Yu if those homes can be remodeled, that may be worth doing. When you consider the cost of buying a replacement home, moving it, setting it up, and then completing any repairs, it usually makes way more sense to renovate the existing home instead.  Even if it is an older home, you should be able to renovate it for less than it would cost to replace it. 

Before you pursue any direction, make sure there is adequate demand in the area. Here are some simple steps to complete that:

Start with the apartments in the area. Call them and ask how much a 2 bedroom apartment is. It should be at least double the lot rent at a mobile home park in the same neighborhood. Then ask how many vacant units there are to choose from. If you find that the apartments have a low vacancy, that is a good sign. If you find high vacancy, that is a red flag for the market and you should be cautious. You should always consider apartments as an option for your prospective tenant, because if it costs them more to make payments on the mobile home plus pay the lot rent, they might just rent an apartment instead. Most people might miss this little nugget, but it is a quick way to determine the lack of demand and where lot rent should be in the market.

Next, call the similar quality parks in the area. Ask them what their current lot rent is and what else is included/excluded? Ask if they have any rentals in the park and how much those rent for. Ask them if they have any homes for sale in the park and what the details are, and how many homes have sold recently. Do they finance? How much do they require down? What kind of credit do they require? Ask them if there are any vacant spaces in the park and what incentives would they offer if you brought your own home into the park. From those calls, you will have learned what your competition is related to lot rent, the sale of homes, how many POH they have, and what incentives you may have to offer as you sell homes.

Next, you can advertise a home for sale yourself as a "test ad". Place ads on every platform you can where home buyers could be looking for an inexpensive home. The goal of these test ads are simply to find out how much interest there is in the market for the homes you will be selling once you purchase the park. Make sure to advertise in all the available channels you can find so you can perform a true test. (craigslist, FSBO, zillow, etc. as well as placing signs on the street corners in the area) If you don't receive any calls, that would be a big red flag.

Take the time to do this right and you will be glad you did. If you get positive signs from all those efforts, then it's possible the previous owner was simply neglecting the park and you could have a good opportunity on your hands. Remember, raising rent, filling vacant spaces and selling POHs is all about market demand. Make sure it is there or you won't be able to execute your strategy to meet your pro forma and you'll end up wishing you had never bought the park.

Assuming there is adequate demand, then the park may be worth pursuing at the right price. The basic "back of the napkin" evaluation that will usually tell you where pricing involves the NOI and a market cap rate. If you don't have financials, you can calculate the expected NOI by multiplying the number of occupied spaces currently paying rent by the monthly lot rent, then multiply by 12 months, subtract the expenses, which can range from 30-50% depending on variables, so use 40% for your back of the napkin analysis. Once you have the NOI, divide the NOI by the market cap rate (in today's market conditions, the cap rate will likely land between 6% and 9%, depending on the market you are in. So if you are in a 7% cap rate market, you would divide the NOI by .07 and that would give you a target for the value of the park.

That basic valuation will tell you if the price expectation from the seller is in range or not. If it is close, then it deserves a closer look. If it is way off, you will need to understand what you are missing or negotiate the price. 

All the best,

Jack