Once & For All, Here It Is!
Blog Posting # 598 @ 14 August 2020; Copyright 2020. Educatemhc.com
Perspective. ‘Land lease communities, previously manufactured home communities, and earlier, ‘mobile home parks’ comprise the real estate component of manufactured housing!
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INTRODUCTION: There’s nothing new in this blog posting. I’ve been teaching and writing about these ‘tools of the trade’ for a long time. However, between attrition and new hires, I know we need to keep this near-proprietary information out and about, for your benefit and education. So, read and enjoy; be sure those you work with in land lease communities know these techniques as well. GFA
Once & For All, Here It Is!
How to know the ‘affordable housing payment amount’ in any local housing market, and ‘how much house’ any prospective homebuyer can afford to buy!
As many of you, who know me and read this blog and EducateMHC’s The Allen Confidential! newsletter, I have long maintained that ‘low income housing folk’, a.k.a. ‘housers’ hijacked the concept and reality of affordable housing. A recent article (‘The Changing Face of Affordable Housing’) in the Institute of Real Estate Management’s (‘IREM’) Journal of Property Management magazine, contained this telling paragraph:
“Doing more with less has been the mantra for affordable housing for many years. Program compliance, which is typically not consistent between (sic) the four or five funding sources, means managers are completing multiple reports. This reduces available time to connect with residents.” P.41…and limits the scope of affordable housing to low income, and very low income, housing users! GFA
That has little-to-nothing to do with what makes a local housing market, or prospective homebuyer’s search for a home, in either case, AFFORDABLE! What really and truly does peg the dollar amount of affordability? Here’re the answers:
The local housing market, whether there’s a home-selling presence there now, or contemplating launching such a business presence, here’s how to peg affordability:
1. Identify the postal zip code for said local housing market and visit zipwho.com to ascertain the Area Median Income (‘AMI’) of the populace who live there, e.g. $50,000.
2. Multiply the AMI by widely-accepted Housing Expense Factor (‘HEF’), to identify the $ amount needed, for a prospective homebuyer to rent a conventional apartment or buy a home in that local housing market; e.g. $50,000 X .3 = $15,000 or $1,250 per month.
3. A caveat applies here, as well as in the next scenario. When the $15,000 pays PITI alone (principal, interest, taxes, insurance), the transaction is ‘risky’, requiring the homeowner to pay more each month (i.e. utility bills) for his/her home. When the $15,000 covers PITI & annual housing expenses (i.e. utilities), the transaction is truly ‘affordable’ – but also means the homebuyer buys less home than via the ‘risky’ route.
4. Which way will you sell and finance your home buying customers?
The prospective homebuyer, or in the case of a land lease community – homebuyer/site lessee, the process is pretty much the same, but for the inclusion of monthly rental homesite fee in the 30% Housing Expense Factor set aside to pay PITI & utilities each month – or not.
1. Identify prospective homebuyer’s Annual Gross Income or AGI (equivalent to AMI in previous scenario; amount will vary from person/family to person/family), e.g. $50,000.
2. Multiply the AGI by widely-accepted 30% Housing Expense Factor (‘HEF’), to identify the amount needed by prospective homebuyer to buy a home in the local housing market or live in a land lease community, e.g. $50,000 X .3 = $15,000 or $1,250 per month.
3. The caveat here is the same as described above, relative to ‘risky’ vs. ‘affordable’ transactions, plus this twist. When living in a land lease community, the monthly fee for a rental homesite must be accounted for in the $15,000; covering PITI, annual utilities – or not, and definitely, rental homesite fee.
What you read above is the proverbial ‘bottom line’ relative to affordable housing. Sure, low income housing folk will continue to refer to LIHTC (low income housing tax credits) and Section 8 housing, and other programs, as characteristic of affordable housing. But now YOU know the truth of the matter. Affordable housing has directly to do with the AMI of any local housing market identified by postal zip code; and the Annual Gross Income a prospective homebuyer/site lessee ‘brings to the table’ when purchasing his/her new or resale home.
Believe it or not, there’s actually an easy-to-use worksheet available, for FREE, for you to use when working either or both affordable housing scenarios. It’s called the ‘Ah Ha! & Uh Oh! Worksheet’ and is available to you from EducateMHC. Simply request it via email@example.com
Once & For All, Here It Is!
Quickly & Easily Estimate the Capitalized Income Value of Full, and Less Than Full, Land Lease Communities, In Average Condition, Using the New Rule of 72!
Prior to 1994 I made a comfortable living, in part, as a review appraiser of (then) manufactured home communities. Two years earlier, while on active duty during Desert Storm, and working in Honduras, I compiled the ‘first ever’ industry standard chart of operating accounts and related operating expense ratios (OERs’), based on the Institute of Real Estate Management’s professional property management Experience Exchange format. This chart and OER data was published in a J. Wiley & Sons case bound text titled: How to Find, Buy, Manage, & Sell a Manufactured Home Community, 1996 & 98. That pretty much ended my review appraiser days, as ‘everyone’ now had access to the chart of accounts and OERs I’d been using for the past decade. *1
A few years later, Susan McCarty (daughter) and I created the Valuation Calculation Worksheet, a.k.a. VCW, using features from all three income-producing realty perspectives: market, income, and replacement values. The goal was to provide a ‘do it yourself’ tool for sole proprietor community owners, so they would not have to rely on estimate produced by itinerant real estate brokers. And the VCW worked well, and continues to do so, but the perennial need was for something even simpler and accurate. Hence the New Rule of 72.
Everyone, it seems, has heard of, and likely used, the original Rule of 72; to wit: At a given percent return on one’s money, how long does it take to double in value? Simple. ’72 divided by the ROI, e.g. 20%. Or, 72 divided by .2 = 3.6 years to double the value.
New Rule of 72 is amazingly simple to use. Drive through an average land lease community and count the number of rentable homesites, both occupied and vacant, e.g. 200. Then ascertain the monthly rental homesite fee, e.g. $200.00. Now, multiply 200 sites by $200 and that total by 72. Result? $2,880,000.00 is what that property would be worth if 100% occupied and everyone paying rent current at $200/month. Per site value = $14,400/site.
Rarely is a land lease community 100% occupied; always something less. So, ascertain the number of occupied and paid current rental homesites with homeowner/site lessees in place (e.g. 180). Multiply 180 sites by $200 and that total by 72. Result? $2,592,000. Per site value = Again, $14,400/occupied site, plus a lesser value for the vacant rental homesites.
Doesn’t get any easier than that! An important thing to remember, however, is the New Rule of 72 applies only to AVERAGE land lease communities. ‘A’ grade communities will be worth more, and ‘C’ or ‘C’ grade communities less than estimated here. How to know? Use the ABClassification Process form available via EducateMHC (www.educatemhc.com).
1. Prior to 1992, most MAI appraisers, when it came to manufactured home communities, used an average overall OER of 50-55% (Characteristic of conventional apartment communities). Truth of the matter was, and still is, the accurate average overall OER for (now) land lease communities, was and is, 40+/-%! Why the significant difference? Given their higher turnover of tenants, conventional apartment communities must market much more (i.e. staffing & advertising); and upon turnover, must paint units, service utilities and appliances, and clean or replace floor coverings. Bottom line? Valuations of manufactured home communities, back then, were oft – if not always, undervaluing these income-producing property. And frankly, the larger the community, the more the overall OER shrinks in size (e.g. 40 to 20%), as operating expenses remain fairly constant, while income increases with physical and economic occupancy growth.
George Allen, CPM, MHM