Buying/Selling a manufactured home park: Selling a manufactured home park.
If you’re new to the manufactured home park market or new to real estate, in general, this article will help you to better understand the ins and outs of the manufactured home community process. This is Part Two of, “A First Time Mobile Home Park Buyers Guide”. Part One focuses on industry verbiage, community operation models, utilities, and where to find listings. If you have not read the first article in this series, please click here.
Below is a synopsis of the three categories of home ownership often found in manufactured home parks:
Tenant Owned Homes: Tenant owned homes are the most common, and what many seasoned mobile home park owners to be the best option. When tenants own their homes, they pay a standard lot rent fee each month and own their own manufactured home within the community. The tenants are responsible for their own home maintenance, taxes, and insurance. Having a large percentage of tenant owned homes, lowers the operating costs for the community owner. Tenant owned homes also inspire a pride of ownership and allow tenants to make decisions on their manufactured homes in terms of remodels or renovations.
Park Owned Homes: Park owned homes are also fairly common. With park owned homes, the owner of the manufactured home community also owns the homes and rents to a tenant. This practice is similar to a single family or apartment rental. This means that the owner of the community is responsible for taxes, insurance, and maintenance on the park owned homes. While this does increase operating costs, it also increases the gross income, so this can be a good model for smaller communities, especially if the homes are newer and require less maintenance.
Rent to Own Contracts: Rent to own homes are, most simply put, a hybrid between tenant owned homes and park owned homes. In these situations the owner of the community holds the title to the home, and sells the homes on a monthly payment plan plus lot rent. In most instances the rent to own contract will state that the tenant is responsible for maintenance, taxes, and insurance. This model is a great way to transition a primarily park owned home community into a tenant owned home community over time, while still allowing for the higher income of the park owned home model.
How These Factors Affect Pricing: When brokering manufactured home communities, we have several ways of pricing based on the breakdown of tenant owned, park owned, and rent to own contracts. The most common way we do this is through what is referred to in the industry as a blended CAP Rate. Lot rent from tenant owned homes is put into one category, along with the lot rent portion of park owned and rent to own homes. After that we break down park owned home income above lot rent and add that to a seperate column to show it is a percentage of income compared to strict lot rent. For rent to own contracts, most lenders and buyers will want to assign the value at roughly 50 cents on the dollar of the remaining contract. To put that in perspective, a contract with $25,000 of remaining value will be added into the purchase price at a value of $12,500. Most buyers and lenders use the 50% valuation in order to account for the risk of the contract defaulting. Depending on the condition of the homes, the total number of contracts, and the overall tenant pool, this value can increase or decrease accordingly. Once we have all of these categories broken down, we analyze comparable sales and assign a rate based on lot rent only, and then run a separate analysis on the park owned home income at a higher return due to the risks involved. Once both of those have been assigned a value range, we blend the two prices together and add in our rent to own contract values based on the remaining balances. While there’s much more to the process, such as ensuring the debt ratio, Gross Rent Multiplier, cash on cash, and rate of return pencil out in line with the comparables, that is a broad strokes approach to valuing a manufactured home community.
Why this Matters to Buyers: Many buyers in the manufactured home community, especially new buyers don’t have a strong understanding of how income should be categorized within the industry. This is why working with a reputable broker that is familiar with the process is necessary, especially when starting out in the industry. Many brokers, especially those that are not specialists in the manufactured home park space, will value properties incorrectly which sets unrealistic expectations for the sellers and makes the process more difficult for everyone involved. I have even seen properties sell for more than they are worth to new buyers. One example was a primarily park owned home property that sold for $400,000 when we had a value of $260,000 due to the factors mentioned above. These buyers severely hurt their long term value and risked being upside down on the property in the event they need to sell or refinance, which can be a significant setback for any owner.
Why it Matters to Sellers: Selecting the correct manufactured home park broker is a key step in ensuring the process runs as smoothly as possible and that your expectations are met. If you are considering selling a manufactured home community, please reach out to us for a free valuation.
For more information on valuing manufactured home communities, or any questions about the industry, visit our contact page.