Underwriting 101

Sep 16, 2022

MHP Brokers Tips and Tricks Podcast, Underwriting 101

In this episode of The MHP Broker’s Tips and Tricks podcast, Maxwell Baker, president of The Mobile Home Park Broker, will talk about the basics of underwriting mobile home parks and RV communities.  

This and every Tips and Tricks podcast episode are brought to you by The MHP Broker’s’ proprietary Community Price Maximizer. Use this four-step system to get the highest price possible for your mobile home park or RV community when you sell it through The MHP Broker. Guaranteed. Ask Max for details.  

Here Are the Show Highlights:

• This is the first of what will be multiple Tips and Tricks podcasts on the variables in underwriting mobile home parks principally, but also RV communities. Think of this initial podcast as an introduction to the subject, a sort of Underwriting 101. (:56)
• We’re not appraisers, but we conduct the evaluations of communities that lenders often refer to in appraising communities. (:56)
• Utilities are often the number one variable we rely on. Your water system variables on city water include mass metered systems, direct billed and sub-metered. Then there’s well water. Direct billed systems are best in that the resident deals directly with the utility for water and sewer, leaving you totally out of it. Mass metered and sub-metered systems are less desirable to investors, in that the meters can break down over time and you might end up paying for more water than you think your community is using. And, of course, you have to bill your tenants for water. (:56)
• After direct billed systems, well water can work out okay as long as the well is drilled deep enough and doesn’t go dry. Owners in some states can turn a small profit in billing tenants for their well water, but North Carolina, for instance, is very critical on charging tenants for water this way. So it just depends on the state. (2:57)
• Lagoons are common as water sources in some parts of the country. Owners might think of them as “free” water, but the cost of filtration and sewer treatment equipment can get ridiculously high. (5:03)
• Septic tanks are another variable. Some can be at large as a three- or four-bedroom home while others might be two or three times that size! I’ll have more to say about septic tanks in future underwriting-themed podcasts. (7:08)
• Yet another variable is park-owned vs. tenant-owned homes. Most parks consist of POHs, but you have more TOHs in the inner cities. These are desirable because you can have lower cap rates with them, and less responsibility in terms of maintenance and upkeep. Parks that sell the fastest are those with TOHs, direct billed water and sewer and paved roads maintained by the city. In other words, the less you the owner must do, the more valuable the property. (8:12)
• Paved roads are the most desired, with dedicated gravel and dirt roads much less valuable, but less of a problem if they’re owned by the city. You can call for maintenance and repairs rather than having the handle them yourself. Concrete roads are problematic because they crack easily and frequently have potholes. (9:42)
• When investing, you must also look at the property management situation. Some parks have third-party property managers, some have inside managers (they live there and work for rent reduction). The most problematic is the park in which the mom and pop owners are the managers. When they leave or retire, it can take significant time to put new management in place. In the meantime you get tenant complaints and maybe even new vacancies. So this is the most high-risk variable in this area. (11:09)
• Good clean and complete books and records are most desired and can reduce the cap rate because they decrease investors’ risk. (13:25)
• Occupancy rates are perhaps the most critical variable when selling your park. One that’s fully or largely occupied gives the new owner less to do and will usually come in at a lower cap rate. (14:06)
• On a related note, now is also a good time for park owners to invest in good used mobile homes as prices come down from the highs during the pandemic. (15:04)       

Reach out to Max to see how The Mobile Home Park Broker can evaluate your community and help you get the best selling price possible. Just drop him a line at [e-mail] or give him a call at 678-932-0200.

Power Quotes on This Episode:

“This is the creme de la creme when it comes to mobile home communities, city water

and sewer, direct billed.” (2:57)  

“...if you've got a community that's direct billed, paved roads owned by the city and not

private, all tenant-owned homes, lot rents in the $300 and up, I can tell you right now I

can make three phone calls and get you a six cap on something like that,

especially in a primary market. (8:12)

“Management is a huge variable, because you've got some management companies

that are massive, and sometimes they're outsourced. Sometimes there is none and

sometimes there's a mom and pop doing it. Obviously, the ones that are the less risky

are the ones  that are internal and they're finely tuned, they've been working there for

several years.” (11:09)

“If you’ve got (good books and records), the more information y'all provide about your

community, the higher the price, the lower the cap you're going to get. Because when

 you lack information, there's higher risk, which means a higher cap rate.” (13:25)