As a mobile home park owner and investor, knowing how to correctly value the vacant mobile home lots and park owned homes within a park is crucial for making informed investment decisions. As a buyer, you don’t want to include either of these in your valuation of the mobile home park, but sometimes you might have to make up the difference between your offer and what the seller will accept. So how do you know how much more to offer for these assets?
If park owned homes and vacant mobile home lots are valued incorrectly, they can have a significant impact on the overall value of the park, which can lead to overpaying and losing money. If valued correctly they can provide an opportunity for the new owner to generate extra income and make a profit.
In this guide, we will take a closer look at the factors that affect the value of vacant lots and park owned homes in a mobile home park. We will explore the methods used by professionals to value them and provide some examples. By the end, you will know exactly how much extra you can afford to offer and therefore make better investment decisions. Let’s start with vacant lots.
How to Value Vacant Mobile Home Lots
When valuing vacant lots within a mobile home park, your first instinct should be to look for every possible reason to give these lots no value at all. Here are some of those reasons:
- Zoning: If the zoning of the lot includes any restrictions or it is illegally zoned then it is of no value to you. For example, the seller is advertising 60 lots, but the park is recognized by the zoning and land use department to only have 50 lots.
- Access to Utilities: Utilities such as water, sewer, and electricity must be already in place. If the seller is advertising 50 lots, but 5 of them are in an overgrown field without utility hookups, you are going to have capital expenses involved with clearing lots and bringing in utilities. If you are going to put in the work to do this, you should be paid for it. Therefore, these lots have no value to you when evaluating the deal.
- Market Demand: The demand for affordable housing in the area, including any trends or fluctuations, can also affect the value placed on vacant mobile home lots. If you find that the population is declining, employers are relocating elsewhere, and your test ad does not show much demand in the area, then you would have no reason to assume that you can fill vacant mobile home lots quickly or at all. This is a situation where I would probably not buy the park at all, but definitely do not apply any value to the vacant lots. Bestplaces is a great site for doing this research.
Vacant Mobile Home Lot Evaluation Example
Alright so let’s look at a situation where you might give the vacant mobile home lots a small value. The situation, as mentioned earlier, is if you and the seller are close to agreeing on a purchase price. First, we have to consider what the lot is worth to us as the buyer when there is a paying resident living there. Then we have to consider what it is going to cost us to obtain that paying resident, as well as make a profit for the work involved.
In order to value the lot when it is occupied, we take our annual lot rent and divide it by our market cap rate or the cap rate we plan on selling the park at. For example, a lot rents for $300 per month in a mobile home park or $3,600 annually. We will use an average cap rate of 10% to make this easy to understand. The value of the lot would be $3,600/10% or $36,000. If you do not know what a cap rate is, I have explained it in another post on how to value a mobile home park located here.
Great so the lot is worth $36,000 when occupied, but there are costs associated with finding a mobile home, moving it to your lot, and getting it ready for the tenant. Let’s continue our example:
- You find a mobile home to buy for $10,000 that is in decent condition structurally but needs basic repairs and cosmetic updates.
- You pay $5,000 in moving costs to transport and set it up on your lot.
- You then spend $3,000 painting, fixing cabinet doors, patching holes in the flooring, etc. in order to get it ready to advertise.
- The lot is worth $36,000, but we spent $18,000 to put a home on it and get it rent ready.
Most likely you are going to have to sell this home on a rent credit program, where you credit a portion of the monthly rent to the tenant towards the purchase of the home. You might choose to sell the home for $30,000 over 5 years, but you are not going to include any of this income in your valuation of the lot, this is yours to keep for completing the process.
Additionally, you should be able to take a profit in the form of equity in the mobile home park as soon as the vacant lot is filled with the new paying resident. We said the lot is now worth $36,000 in equity, you spent $18,000 to achieve this. If it were me, I would like to see a profit of $10,000 in equity as soon as the lot is filled. We are working backwards so this means that I might pay $6,000 for the vacant lot.
$36,000 Occupied lot value – $18,000 Setup Costs – $10,000 Profit in Equity = $6,000 Vacant Lot Value
That is the total price that I would pay for the vacant mobile home lot, you do not divide this income by the cap rate. If I valued the park at $1,000,000 before the 5 vacant lots, then I might go up to $1,030,000.
If a park has a lot of vacant lots, you need to really be sure that you can fill them easily based on your due diligence of the market, before you assign a value to all of them. There is no set formula to valuing vacant mobile home lots, it is up to you and your investment goals. The example above is just how I do it. If you value the lots higher, then that just means you will receive less equity in return for your efforts and vice versa.
Bonus: Secret Strategy I Use to Fill Vacant Mobile Home Lots in a Strong Market
As we discussed, a strong demand for affordable housing in your market is essential for success when it comes to filling vacant lots. One strategy that I use to fill vacant lots is to advertise that I will pay for the moving costs of new residents. Why would I pay to move someone else’s home to my lot? There are a few reasons:
- It costs me between $5000-$8000 to move and set up a mobile home on my lot. This is a lot cheaper than buying, moving, and renovating a home.
- The value of the occupied home on my lot is worth 10 times the lot rent or more. This equates to $30-$50,000 or more in some cases. Not bad for spending $8000.
- I receive monthly income through lot rent which pays for the move in two years or less most of the time. You can negotiate a higher rent for a short period to recuperate some of the moving costs as well.
- You do not have to worry about sketchy rent to own programs that may not be in compliance with the Safe Act and Dodd Frank.
If you provide a quality place for the resident to live, then there is no reason to believe that they will leave before your investment pays off. If they needed financial help to move the home in the first place, they most likely will not move the home out. Most of the time, if they wish to relocate they will sell the home to a new resident. Okay time to move on, how do we value park owned homes in a mobile home park?
How to Value Park Owned Homes for a Mobile Home Park Investment
Valuing park owned homes within a mobile home park can be more challenging, as traditional methods such as the income capitalization method does not apply. As a mobile home park owner and investor, it’s important to understand that the goal is not to own the homes, but to rent the land. Renting the land is the winning business model, so we try to put little if any value on park owned homes. Okay so why doesn’t the income capitalization method work?
Let’s look at an example:
- A mobile home park has 30 lots. 10 of the homes are owned by the park owner.
- The lot rent in the park is $300 per month. The park owned homes rent for $700 per month.
- We will say that the expenses related to the park owned homes are about $100 per month. This leaves a net of $700-$300-$100 = $300 per month or $3,600 per year of park owned home income.
- If we are looking to purchase this park at an 8% cap rate and we apply that cap rate to the park owned home net income, we are valuing the home at $3,600 / 8% = $45,000.
- So, you can see the problem here. I don’t know any park owners who are looking to purchase $45,000 mobile homes for their vacant lots. You might find this in the nicest communities, but at $700 per month in rent we are talking about B and C class single wide mobile homes.
- If you used the income capitalization method for all 10 park owned homes, you would being paying $450,000! It could be very likely that the cash value of these homes is closer to $5,000-$10,000 each.
If you capitalize the park owned home income, you will overpay for the park and you will not be able to sell off the park owned homes and still generate much of a profit if at all. This all assumes that you found a lender that will lend on the park owned home income, which most won’t.
There are a couple of methods used for valuing park owned homes. One way is to value the home based on the cash price in the current market. This could involve looking at comparable sales and adjusting based on the differences between homes. I find reliable mobile home sales data somewhat hard to obtain so I choose to value the mobile homes a different way.
I will pay up to 50% of what I could sell the home for using a rent credit program. Here is what this would look like:
- A mobile home rents for $700 per month.
- $300 goes to lot rent and the additional $400 goes towards a credit. The credits can be used to purchase the home after 4 years.
- After 4 years, I will assign the title over to the tenant for free.
- I will make $400 x 48 months = $19,200.
- I would pay $19,200 x 50% = $9,600 for this mobile home.
If there were any lot rent raises, then the rent of the home would increase by the same amount and the net rent credit would remain at $400. For example, a lot rent increase of $20 would increase the tenants rental amount to $720.
If there are vacant park owned homes, I will first calculate the repair costs that I think the home needs in order to sell it. Be conservative in estimating repair costs. I will then subtract the repair costs from 50% of what I could sell the home for using a rent credit program. In our example above if the home was vacant and needed $4,000 of repair costs, I would subtract $4,000 from $9,600 and pay $5,600 for the home.
Some mobile home parks you buy might have park owned homes that have a note attached to them. In this scenario I will try to pay whichever is lower: the remaining note balance or 50% of what I could sell the home for using a rent credit program if the buyer was to default.
Final Thoughts: Vacant Mobile Home Lots and Park Owned Homes
Investing in mobile home parks can be a profitable venture, but it’s important to properly evaluate vacant mobile home lots and park owned homes in order to maximize returns and protect your investment. When valuing vacant lots, it’s important to take into account factors such as zoning, access to utilities, and market demand. By considering the costs associated with obtaining a paying resident and the potential for profit, investors can determine the right amount to offer for a vacant mobile home lot.
When valuing park owned homes, it’s important to remember that the goal is to rent the land and not own the homes. Traditional methods such as the income capitalization method do not apply, and the value placed on these homes should be minimal. I hope this article has cleared up any confusion you might have and just remember that these methods are not set in stone. You can modify the numbers to meet your individual investment goals. Good luck!