Like most real estate the Seller usually wants too much and the purchaser wants to pay too little for a mobile home park. Certain buyers may have different motivations for buying a certain park (1031 money, ability to obtain better financing, conversions to other uses, and location to where they live). In this book we will only look only at the value of a mobile home park for the typical buyer who will continue to operate it as a mobile home park.
Anyone that has seen an appraisal on a house or most types of real estate will have heard mention of the 3 approaches to determining the value of that real estate. They are the Cost, Sales, and Income Approach. Newport News mobile home parks offers excellent info on this.
Unless you are coming up with the value of a brand new mobile home park or one that is predominately vacant, I do not see any reason to use the cost approach. It is not likely that a new mobile home park will be built nearby and what it would cost to build a new park does not even take into account the amount of time, effort, and money it takes to fill that park up with occupied and paying residents.
As far as the Sales or Market Comparison approach to value, this is also highly suspect. This is based on comparing the sale of the subject property with other recent sales and adjusting for differences that you may or may not know about. Problems with this approach include varying expenses, rents, and management. Whether you are an investor or appraiser I would just use this approach as potential information and not draw any conclusions from it. Here is a quick example of the improper use of this approach from my experience:
Property A: 50 lots, 100% occupied, Lot Rent of $179.00. Lots will hold a maximum home size of a 14′ x 60′ – Water and Sewer is submetered back to residents – NOI of about $75,000.
Property B (10 miles from Property A): 53 lots, 10 vacancies, Lot Rent of $150.00. Lots will hold 16′ x 80’s and doublewides. Park pays water and sewer – NOI of $45,000.
Property B is sold in December of 2004 for $425,000.
The owner of Property A(one of my LLC’s) goes to the bank to refinance the property in January of 2005. The appraiser appraises it at $400,000 and places the most emphasis on the Sales Comparison Approach as Property B just sold and it was a superior property in terms of size, appearance, and location. In fact in the appraisal report, he claims that we were charging too much and that our numbers were inflated.
After arguing with the bank and appraiser for a couple of weeks, we were refunded our money for the appraisal. In the meantime, we were approached by another investor who made us an offer of $645,000 for the park and we accepted and the sale closed by the end of March 2005. I really wanted to send the appraiser a copy of the closing statement with a nice letter but decided against it.
The point is that even though one park may look nice, be in a better location, and have so much more going for it on the surface, does not mean it is worth more per space or even worth as much per space as an inferior looking park.
As a side note, once I found out that property B was sold for $425,000 I was in contact with the new owner and tried to buy the park from him – I offered him $50,000 more than he had just paid and he didn’t want any part of it. He knew he had just made a tremendous buy and was already raising the rents and starting to get his lots filled up.
The third approach to value is the Income approach and I find that this is really the best and only way to evaluate a mobile home park correctly. I have come up with a basic formula in which I value the park based on what it is currently doing, what it should be doing, and what it will do once I implement some basic changes and run it more efficiently.