MHP Sewer vs Septic

MHP Sewer vs Septic

Which is better?

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MHP SEWER vs SEPTIC? THAT IS THE QUESTION!
Many potential buyers/investors in Mobile Home Parks are faced with the decision between City Sewer or a privately-owned Septic System, usually within the park itself. I often talk with newcomers to the MHP business who insist that they won’t consider any park with a septic system. They fell they must be hooked up to City Sewers, for fear that a Septic System will be trouble, down the line. Are they right? Should Septic be avoided at all costs? Let’s consider both sides.

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MHP SEWER vs SEPTIC – SEWER SYSTEMS
THE PROS:
City Sewers are considered by many to be desirable because it is presumed that they will be trouble-free. No tanks to pump out, as can sometimes be required with septic systems. And no risk of it ever “going bad” (ie: not working, not working well enough, or not meeting government guidelines). These are all really perceptions, more than reality, but perceptions make a difference sometimes. Parks that have City Sewer, instead of Septic, are considered desirable by all the people who don’t like Septic, so in theory, it could be easier to sell a park with City Sewer than it would be to sell a comparable park with Septic. Again, this could be as much perception as actual reality.

THE CONS:
The biggest detriment to City Sewers over private Septic Systems is one of cost. Not the cost to set it up (although this can also be quite high), but I’m speaking here of the cost to operate it. City Sewer is fast becoming one of the most expensive ‘utilities’ in the MHP business, and it’s going up and getting worse by the year, due largely to the environmental overreach of government. The costs can be quite high. And the assumption that these systems will be trouble-free is a bit misleading. The greatest maintenance expense in most MHPs on both City Sewer and Septic, is usually clearing clogged drain lines. This is most often due to diapers or other things flushed down the toilets, tree roots breaking through lines, or heavy vehicles crushing underground pipes. These problems almost always seem to happen on MHP property, which means the repair costs are borne by the MHP itself, even if it’s hooked up to the City Sewer System. The City only fixes problems on City property, not on your property.

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MHP SEWER vs SEPTIC – SEPTIC SYSTEMS
THE PROS:
Septic Systems are simple, well-proved, and have been around for centuries. A good working system, properly designed and set up, and in good soil, can and usually does operate more or less trouble-free for years. Their single greatest advantage over City Sewer systems however, is cost. Monthly bills on City Sewer systems can be very high, eating up profits. Even if a Septic System needs an occasional tank pumped out (at around $100 to $300 cost per tank), the cost is still much lower than paying those high City Sewer bills each month.

THE CONS:
The obvious disadvantage to Septic is that something can go wrong. We’ve already discussed the most typical problems with both City Sewer and Septic systems, that being stoppages or breaks in the sewer lines on MHP property. Again, these are always the responsibility of the MHP, not the City, even if it’s hooked up to the City’s Sewer system. That leaves us with problems with the Septic System itself. Again, if it was properly designed and installed, and the soil is good, System problems are fairly rare, but they can happen. If a tenant leaves the water running for days, or a toilet runs continuously, the water (not waste) fills up a tank, that tank may need to be pumped out by a Septic service company (again around $100 to $400 or so, usually). Another possible scenario (although it’s not probably the worst thing that can happen) is when a good system in good soil stops working because the soil either becomes permeated with water (usually from heavy rains or flooding), or with something that clogs up the soil. In areas where cooking is usually done with lard or lots of oil or grease, over many years, this can accumulate in the soil around the leach lines and clog it up so that the soil can’t absorb anymore water. This is rare, but it can happen. The solution here is to either relocate and install a new leach field, or dig up all the bad soil around the existing leach field and replace it with fresh soil. As expensive as this can be, even it can be cheaper than paying monthly City Sewer bills for years and years. As more or less a worst-case scenario, a septic system can be so bad, or become so bad that it can’t be operated anymore and must be replaced, or perhaps can’t be replaced for various reasons. Again, this is exceedingly rare, but it can happen. The obvious safeguard against this is proper due diligence. If you have concerns, hire a local septic contractor to do a thorough inspection, or even have them send a camera down the lines and take video of the entire system. Again, the basics of Septic are quite simple, so problems should be fairly obvious, upon close examination.

MHP Sewer vs Septic: The Financial-Side

MHP SEWER vs SEPTIC – JUST MAKE THE TENANTS PAY, RIGHT?
The argument we hear often from the Pro-Sewer group is that the tenants are paying for the Sewer bill, so who cares? Let’s say your space rent is $350 per month, and the tenants pay an extra $30 per month as a flat fee for the sewer service. So they are paying a total of $380 per month. But you don’t get to keep all that money, $30 of it has to be sent to the City each month for each space. But, if your park were on Septic instead, there wouldn’t be a monthly sewer bill to pay, so you could charge the same $380 per month, but you would get to keep it all. Multiply that times 50 spaces, and that $30 adds up to $1500 per month, or $18,000 annually. That would drop straight to the bottom line (ie: it will increase your Net Operating Income (NOI) by that amount. And since NOI is the main determinant of value in MHPs, the value of your park would go up. If you’re in a market where parks are selling at an 8% Cap Rate, that extra $18,000 of NOI would make the park worth $225,000 more in value. That’s a lot of money.

MHP SEWER vs SEPTIC – AN ACTUAL EXAMPLE
Here’s a real-world example of the difference than can exist, financially, between a park with a City Sewer system and one with its own Septic system. I bought two MHPs in Northern California in 2005. One was in Sacramento and it was on City Water and Sewer. The other was in Modesto, and it was on Well and Septic. The Sewer bill on the Sacramento park was about $1,800 per month, of course the Septic system on the Modesto park had no regular monthly cost. I sold both parks within a few months of each other in 2014 and 2015, so let’s call it 10 years just to use round numbers.

MHP SEWER vs SEPTIC – BIG MONEY
In the 10 years I owned the two parks, I spent $216,000 on City Sewer bills for the Sacramento Park. During the same 10 years, I had to pump out one septic tank one time (there were a total of 5 tanks in the park), and had to do one repair on some drain pipes that had tree roots break through. The total cost for both was under $2,000. That’s a $214,000 difference, and again, that’s a whole lot of money.

MHP SEWER vs SEPTIC – IT’S YOUR MONEY
The penalty for the Sewer in this example was $21,400 per year. When I sold this park, it sold at an 8% Cap Rate. Not having that added expenses would have made the park worth $267,500 more. Once again, that’s a lot of money. Your money.

MHP SEWER vs SEPTIC – SO WHICH IS BETTER?
It’s not like you’ll normally have a choice between Sewer and Septic at your park. It will be one way or another. Sometimes that can change, but hooking up to City Sewer can be very expensive, even before the big monthly bills start. But what’s really at stake here are the choices you will have, when considering MHPs to invest in. If you insist on looking only at parks with City Sewer, you will not only pass up a huge opportunity for profit, but you will narrow your choices considerably. Many parts of the country are predominantly on septic. Over the years we’ve been in this business, and all the parks we’ve been involved in, it has been our experience that some of the best deals out there are on parks with septic. Avoiding them can deny you of many great opportunities. And that could be a lot of money.

MHP SEWER vs SEPTIC – SEEK ADVICE
There are many more questions that you need answered to improve your odds of success and to minimize your risks. Call and talk to an expert, who specializes in MHPs. I love talking about MHPs and will gladly talk with you and answer your MHP questions with no cost or obligation. And don’t worry about any high-pressure salesmanship. I hate that stuff too. Call me, Andy Tallone, CCI Investments at (925) 323-2134 or email me.

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