Looking at 1st deal with a big red flag

Hi everyone;
I am looking at my first deal, a Mhp in NC, 30 non parked owned homes with a GOI of 58860. The current owner (a mom & pop op) has expenses (2009) at $2541.60 which is about 4.5% of the GOI. To me this is a big red flag even for a non park owned community. Even with increasing the expenses to a 21720 I can still CF although my offer would be below asking price, however, as the expenses are this low does this suggest to anyone the potential of major problems looming .

The current owner also owns 13 of the 30 homes. The community is ok, but a little messy, no leases are in place and the manager does not seem to have implemented regulations or enforced them if they have implemented them.

I have more info but I wanted to get an idea of the general thinking behind this one.

Thanks all
Rob

Rob,

Every seller is going to lie about the expenses - nature of all commercial deals. It is your job to find the real expenses. I know Dave and Frank like to use a general %, so shoot for proper due diligence and shoot for that number.

What I would be first and foremost concerned about is the 13 homes. Make sure they convey - or you could find yourself 13 homes light. Ask me how I know.

Brad Simmons
Bluegrass Region of our State
Danville, KY
[www.StarHomeUSA.com]

Rob,

I'm a little confused on the expense ratio on the park. The industry norm is 30% to 40% of revenue. Are you saying this guy claims it is 4.5%? If so, he must have his decimal place off. About 99% of moms and pops lie about their numbers, either intentionally or because they are so poor at bookeeping as to not even be able to provide accurate numbers.

I heartily recommend that, if you are seriously going to buy a mobile home park, you buy our Home Study Course and learn all the information in it, as well as participate in the weekly quesion and answer hours on Wednesdays. I'll even give you a free quick deal review before you buy this park, just to make sure that you are not making a mistake. Our website is more like a club, and if you join the club we'll do our best to point you in the right direction and keep you out of trouble. There are a ton of issues you need to be aware of to preserve your capital and make a success of it. At an absolute bare minimum, you need to follow our 30 Days of Diligence system to the letter, during your due diligence period, to make sure that you don't walk into a landmine.

I'm not trying to sell you stuff, I'm trying to help you here. The park you are looking at may be fine, but don't buy it until you've thoroughly checked out every inch of it and made sure you have an exit strategy.

MobileHomeParkStore.com

Your Source to Help you Buy, Sell, and Operate Mobile Home Parks for Maximum Profitability

Thank you for the feed back.
I know how to run the numbers on a commercial deal but this is my 1st MHP. I am slightly confused about what you said Brad about 'Making sure they convey', what exactly do you mean?

Thanks again for any help

Hi Frank
I do not believe the owners are suggesting the expenses are generally 4.5% of GOI, but I do agree that they must be either leaving a few things off the expense list deliberately, or are just poor book-keepers. It did of course give the impression of a much higher cap.

Rob,

Make sure you have a due dilligence clause in your contract-take franks advice and check out the info they have. Then ask sellers for thier tax returns or schedule E (i think) for the park. This will show what they are claiming to the IRS. Then Take the Gross Income and multiply by 40% because of the 13 park owned homes (yes its high, but I have a park with many park owned homes and the expenses usually run at around 40% of the gross) .This will give you your actual expenses......also, what I believe Brad means about the homes conveying is that the TITLES to each home will transfer into your companies name so YOU are the owner after the sale not the seller. You would be surprised how sharp some of these mom and pop sellers are !!! See how I do my calcs below (everyone has thier own system and this is a greneral idea of how i run my numbers)

Gross $58860.00
Exp. 40%$23544.00
Vacancy 5% $2943.00
___________
NOI $32,373.00 to produce a 10 cap the purchase price should be $323,730.00


Alex