Paying $148k over value for a 60-lot park because the rent roll counted eleven homes that did not exist.

Here is a case worth studying, because it is an expensive lesson in what a rent roll actually is. Sixty lots on paper. The broker's package shows 54 occupied at $315, so about $204k of gross potential lot rent, and the buyer underwrites off that with a 38 percent expense ratio. Priced at a 7 cap on stated NOI, which for the market is fair to slightly aggressive. Price paid, $1.79M. Here is the step where it goes wrong. The buyer tours the park in February with snow on the ground, walks it once with the seller's manager, and counts the homes they think they see. Nobody sits down with twelve months of bank deposits and ties them to the rent roll line by line. The rent roll lists 54 paying lots. Eleven of those are homes that were removed or abandoned over four years and never taken off the roll, plus two where the resident died and a family member is sending partial payments. Actual collected lot rent, once deposits are reconciled, runs about $132k against the $170k the roll implies. The seller is not lying in a way that can be proved and pursued. The manager keeps the roll in a spreadsheet and nobody ever deletes a row. An attorney's usual view is that chasing it costs more than it recovers, and that call depends entirely on the state and the contract language, so the buyer needs their own. So the buyer owns a 43-lot park at a 60-lot price. Roughly $148k of value gone at the closing table, more counting the debt service paid on the difference. The counter-cyclical demand story people talk about is real, and a park like this can fill six lots over the next couple of years, but filling a lot means getting a home onto it and that is $40k to $70k each depending on how it is sourced. What to do differently, plainly: no rent roll without twelve months of bank statements reconciled to it, and walk every lot with a printed roll in hand and check off the physical address of each home. All of that happens before the earnest money goes hard.

3 replies

renee_dubois PS1APRO 12

@monica_tran3 the walk helps but it would not have caught the partial payment lots. A home was physically there on those two. The money was the problem. @tylerbrooks9 the deposits reconciliation is the whole answer, and it applies just as well to small multifamily. Twelve months of statements, tie the deposit total to the roll total, then explain every variance. On a 60 lot park at $315 the monthly deposit should land within a few percent of $17k, and this one was showing $11k. That gap was visible from the bank statements alone before anyone went to the property. The open question is why the lender did not catch it. Did they not order anything?

renee_dubois PS1APRO 12

sonia_alvarez CB4APRO 17

@renee_dubois that depends entirely on the loan. On a smaller park a lot of local banks lend off the appraisal and the borrower's global cash flow and never reconcile deposits themselves. They take the seller's certified rent roll as given. On agency debt or a bigger portfolio there is far more scrutiny. Confirm in writing what your lender actually verifies, because assuming they check occupancy for you is a common and expensive assumption. @tylerbrooks9 the number worth adding to your post is what those 17 vacant lots are now worth to you as upside. At $315 a month and a 7 cap, each filled lot is roughly $54k of value against $40k to $70k to get a home on it. That is thin on the high end and decent on the low end. So the loss is real, and the exit is still not necessarily as bad as the closing table looked, assuming you can source homes at the bottom of that range. Can you?

sonia_alvarez CB4APRO 17

Paying $148k over value for a 60-lot park because the rent roll counted eleven homes that did not exist.

3 replies