There are few things more predictable in life than the seller’s expense numbers being lower than they should be in reality. While mobile home park buyers know that the typical operating expense ratio runs 30% to 40%, there’s no question that those seller numbers reflecting 15% to 20% are not accurate. So what’s typically missing in the seller’s numbers?
Not counting their own labor on mowing, repairs and management
Many sellers live on-property and do their own labor. They self-manage the park, mow the lawns and do their own repairs on water, sewer, electrical and other issues. Since they do not obviously send a bill to themselves or get on the park’s payroll, their labor cost falls off the radar screen and they conveniently forget that it needs to be reflected in the park’s operating numbers. Of course, others remember but leave it off because it makes the park look more profitable that way.
Paying personnel under the table
Some sellers have employees but, rather than report them the legitimate way, they pay them in cash “under the table”. As a result, whatever they get paid vanishes into oblivion and won’t be found since there’s no payroll tax, etc. Once again, you can find these errors by simply working through what your labor cost will be regardless of what mom and pop claims. And you should never carry forward with this practice as it opens you up to substantial illegalities and litigation.
Not actually doing necessary maintenance
And then, of course, you have the sellers who actually have not been doing the required maintenance, and that’s why there’s virtually no expenses on that line item. Of course, you’ll see this when you visit the property, as the roads will be filled with potholes, dead tree limbs everywhere, and even water or sewer pouring down the streets. Most park owners use a standard plug number of $150 to $250 per lot per year and disregard the seller’s numbers.
Not having adequate insurance
Even though the seller may have insurance, it’s often the wrong amount of coverage or missing essential coverages altogether. We’ve seen properties with $250,000 liability limits (you need at least a million) and missing property insurance altogether. You only get what you pay for, and these sellers aren’t paying for much. Instead, get with Kurt Kelley at Mobile Insurance in Houston (that’s who most people use) and get some accurate numbers based on actually protecting your investment.
Not using the sales price in property tax calculations
OK this is a big deal. Maybe more impact than everything shown above in some states. And that’s the property tax assessed amount. Some mobile home parks are on the tax assessor’s rolls for a fraction of current value – and after closing that value is going to up. Potentially significantly. In some states like Missouri (where rates are only 1%) it’s not a huge deal, but in some like Cook County, Illinois (where tax rates can approach 10%) it can derail the deal. To be safe, you need to internally calculate a property tax rate based on what you are paying, not what is on the tax roles currently.
Not following the rules on private utilities
Private utilities are not free. They include repair, electricity and monitoring, typically on a monthly basis. One time we looked at a mobile home park that had a lift station (the device that pushes sewage uphill). We went to check it out and mom and pop had never paid the power bill and the unit had been out of operation for years. Somehow, it never overflowed due to low occupancy, but the fact of the matter is that there was no cost on the seller’s statement for electricity and routine maintenance (those lift station engines can be $5,000 or more) and that was misleading if you didn’t know better.
Conclusion
While sellers can be wonderful people, their financials are not to be trusted without extensive verification. There are many expenses that can be missing – and these can have a huge impact on your net income and property valuation. The bottom line is that extremely low expense ratios should be treated with suspicion until they can be fully vetted.