Do You Need An Appraisal On A Seller-financed Deal?

When the seller carries the financing they typically don’t require a formal appraisal. Despite the absence of a formal loan committee there’s still the need for a Phase I Environmental Report and a survey. But do you need to have an appraisal done? In this Mobile Home Park Mastery podcast we’re going to explore the uses of an appraisal, the cost vs. benefit, and some alternatives to help you gain confidence in the price you are paying.

What is Mobile Home Park Mastery?

Welcome to the Mobile Home Park Mastery Podcast where you will learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks! Your host is Frank Rolfe, the 5th largest mobile home park owner in the United State with his partner Dave Reynolds. Together, they also own and operate Mobile Home University, the leading educational website for both new and experienced mobile home park investors!

We've always been huge fans of seller finance mobile home park deals. My very first park, Glenhaven, down in Dallas, was most attractive to me simply because of the seller carry. The guy wanted $400,000 with only $10,000 down, and he would carry $390,000 for 30 years. Seller financing is always non-recourse. Seller financing is typically at a below market interest rate. Seller financing is just fantastic, but when you do a seller finance deal, you always have this one nagging question. Because when you use bank financing to buy a mobile home park, you don't get to choose which third party reports you must obtain. But when you do seller financing, sometimes those third party reports are fully at your option, and then you have to decide whether to do them or not. This is Frank Rolfe, the Mobile Home Park Mastery Podcast, we're gonna talk about those third party reports you have to pick and choose, and most particularly, the appraisal.

Now, when you buy a mobile home park, you have to have a survey. Even with seller financing, you need to have a survey to show that the mobile home park you're buying is truly enclosed within the envelope of those meets and bounds that are part of the survey. And you have to have a Phase I Environmental, if you don't have a Phase I Environmental done, then you're just being stupid because the risk of that failing and what it could do to you if that environmental survey was to go bad would be absolutely crushing. But there's two reports that do you really need. One of them is called the Property Condition Report. That's a mainstay of Fannie Mae, Freddie Mac Conduit Lending. And what you do is you pay someone to go out look at the condition of the park and give you a cost of what they think it would cost to bring it up to some level of quality.

And the problem is, you probably already know that. I don't think probably any buyer hasn't already done their own internal property condition report, and they know where the potholes are and they know where the sidewalks are uneven, and they probably have factored in some price in due diligence to fix that. So very few people, I can't name any who've ever done a property condition report on a seller finance deal. But then you have the appraisal. Now, what is an appraisal? An appraisal is a report that tells you what a third party thinks the value of the property is, and they do it through different means. They look at replacement costs, they do an income approach, they look at comparable sales, and then they render you their opinion and they say, "Okay, here's what it's worth." But how accurate is that final tally of what it's worth?

Now to lenders, they love having this independent party giving them a sense of value, they feel it protects their investment, and they do it in cookie cutter fashion over and over again on every deal. But let's face it, like all systems in America, everything gets somewhat corrupted. And it's very possible that often when appraisals are done, there's probably some inkling, some clue by the appraiser of the number that the lender is trying to achieve. And since everybody likes to have work, a good appraiser would be someone who provides banks what they want because they want to get another job after that. So I don't know if you can say for sure that the appraisal is a true ultimate test of value. Now, there are some medical tests they can do on you, there's EKGs and things like that, and they're pretty scientifically based. So if you were to go and do an EKG and they said, "Oh, well, you have absolutely no signs of any heart issues at all," then you're pretty glad you did it right, because then you think, "Well, okay, this is a computer, almost AI driven report that says, I'm in the clear and I'm feeling pretty good about life."

But if you got that appraisal back and the appraisal said that mobile home park is worth $1,000,000 a million dollars, do you really believe that? Are you really sure? Does that really change things for you? That it reflects what you truly believe the value to be? Remember that a lot of these mobile home parks that people buy, it's part of the valuation is what you do with the property. If you're buying a mobile home park with the intent of raising the rent, filling vacant lots, pushing water and sewer back from the park's expense over to the tenants, these things are gonna have a huge impact on value. And most people, every time they buy a mobile home park, it's to some degree a turnaround project. Some are more heavy lift than others, but nevertheless, you're kind of having to bake into the equation what you think the deal is worth in the end.

And the appraiser isn't very good at that, because appraisers are typically not mobile home park operators, they've never actually bought and turned around a mobile home park before. And so they're much less familiar than you may be with what these different strategic moves will be and how much money they will yield. So since we're typically buying mobile home parks and hoping to drastically improve net income within mere 90 days or so, it then begs the question, how good is that appraisal as far as this really feeling like it's locking on the value? And the answer is maybe not so good after all. And then there's a problem that the appraisal isn't super cheap. A Phase I Environmental may cost you a couple thousand dollars, but you're not gonna get a full appraisal done for a couple thousand dollars, probably more like two or even three times that amount.

And that's money you could spend elsewhere to possibly have a more bang for the buck as far as the park itself, that might buy you a much better sign, or entry fencing, heck in some parks that might allow you to remodel that one vacant park home with the front that's so ugly that draws down the value to begin with. So if you don't get an appraisal on of that seller carry deal, if you go with your own gut instinct of value that's tied to the actual net income and your turnaround plan, what else is there out there that you could do that's kind of like an appraisal to give you some idea of value, so you do get that third party in the room to give you their ideas without having to pay for it? So how can you get kind of a free appraisal? Well, one thing you can do is you can go to see if you can get that seller finance deal financed at a lender.

So how would that work? Well, take the deal because you will need a lender eventually, if not now, you certainly will in the future, and run it by a bank or two and see if they can get you a loan on it, and what that amount would be. Nothing formalized at that point. You're not asking for a firm written commitment from the bank, but you're kinda wondering, "What do you think? Could you make a loan on this deal? And if so, kind of for how much? What would the terms be?" And kind of go on a fishing expedition to get those third party affirmations. You could do the same with a loan broker. Go to the loan broker and say, "Hey, I'm buying this mobile home park. Can you get me a loan on it? Here are the basic numbers. What do you think?"

Now you've got groups that are not only giving you a theoretical perspective, but they're also giving you a real life one, because they're willing to put dollars where their mouth is, whereas the appraiser is never gonna come forward and buy the park from you or finance it. Well, the bank sure will. So that's a really good way to get a free affirmation of value, something to take it out to the marketplace to see if you can get a real loan on it during due diligence, even though seller carry is on the table, who knows, you might get a better deal from a lender. If your mom and pop want a seller carry that on a shorter balloon. Let's say they say, "Well, I can't go any longer than five years." And if that deal is big enough to qualify, let's say for a conduit loan, well, a conduit loan is a decade in length. I would much rather have a conduit loan for 10 years than a seller note for five years. They're both non-recourse, and the conduit interest rate probably won't be much different.

So sometimes if you take that exercise, you'll find that, heck, I'm gonna go ahead and go with the bank on the front end. But again, that will at least give you an idea as far as that value, you want someone to pat you on the back and say, "Okay, this deal makes sense. Yeah, you should buy this." What better resource than a bank? What better resource than a loan broker that represents a bank? The bottom line is that appraisals, although a good and mighty thing for the lending community, you can't really operate without them, banks would never make loans in the absence of the appraisal. Actually paying for an appraisal on a seller finance deal is a relative rarity. Instead, there are free resources and resources that might give you an actual deal in the end, better than your deal, at least as a plan B or second option, simply by taking that seller note and going ahead and shopping it to see if you can get an actual lender who would advance you the money.

This is Frank Rolfe with Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.