MHP Well vs City Water

WHAT’S IT ABOUT?

Obviously, a plentiful supply of clean water is essential for human habitation anywhere. Without it, you can’t live there, practically or legally. In a Mobile Home Park (MHP) dozens, if not hundreds of families rely on your park’s water system to supply their needs. Any interruption in that water supply becomes a major problem very quickly. There are public health issues at stake and these can invariably lead to legal issues if they’re allowed to go too far.

Generally, most MHPs get their water from one of two sources: A well located on or near the property; and a Municipal (City or County) Water System. Many MHP investors and would-be MHP investors have very strong feelings about the subject and its almost always against wells and in favor of City water. Why is that? As always, there are some irrefutable facts and some common myths.

WELL vs CITY WATER

A LOOK AT CITY WATER

PROS

The conventional wisdom is that the City will always be able to provide a good clean source of never-ending water, that will keep your people happy and keep you out of trouble with the State Water Board, or whoever. There’s a lot to be said for that. And if the water is metered at each site, the City (or whoever is providing the water) is responsible for all the underground pipes up to that meter, so you can possibly avoid a costly repair. All for the good.

CONS

The main problem with City water is cost. It can get quite expensive. I owned an 80-space MHP in Sacramento CA for 9 years. We spent on average $700 per month on water. That’s $8,400 each year, $75,600 over the time that I owned it. That’s a lot of money to spend on water! Oh, but you can pass it along to the tenants, you say? Not if you’re already charging market rent. A well might have cost $2,400 for the year, so that $6,000 difference was lost revenue, and it reduced my Net Operating Income (NOI) by that amount. And since the value of a MHP is determined mostly on its NOI, paying that water bill actually made my park worth less.

I ended up selling it at a 7% Cap Rate, which means that $6,000 extra (over the cost of a well) was worth over $85,000 in property value. Did you get that? By paying $6,000 per year more for the City water, my park went down in value $85,000! That’s a pretty big con.

MHP WELL vs CITY WATER

A LOOK AT WELLS

PROS

Wells have been with us for centuries. They are a proven technology and are in fact the source of much of the City water you crave. Provided you have a good one, chances are good that you will have many years of seamless, trouble-free service from it. But the biggest plus to well water is it’s super-low cost. In the example above of my 80-space park in Sacramento, the well would have saved me around $6,000 per year over the City’s water. This alone would have increased the value of my park by $85,000. Again, that’s a pretty big Pro.

CONS

You are responsible for providing not just a reliable supply of water, but it must meet strict water quality standards. You are in effect a water company, you are supplying a small community with all their water. The City/County/State regulates all that, and once they’re in your business, it can be tough to get them back out. Your well will need to be tested once per month for bacteria, then the standards vary from there, state-by-state. They test for various other contaminants as well at various times. Check your local laws.

Some parks have their onsite managers take the samples themselves, then drive them to the lab for testing, which could run around $30 or so. Others hire the lab to come collect the samples themselves, charging $75-100 or more. If you get a bad sample you must take action. If it’s bacteria, you must give your tenants notice, shut down the system and treat with chlorine for 24 hours.

You have to provide a supply of water to your tenants (bottled water will usually work). If the test indicates a chemical contaminant, you may need to install a filtration system. In some cases, you may have to drill a new well. I had to do both on my park in Modesto CA. A new well and filtration system ran me $27,000 in 2007. In a worst-case scenario, it may not be possible to drill a well that can give you the volume or quality required to support the park. That rarely happens, almost never, but it can happen.

MHP WELL vs CITY WATER

THE FINANCIAL SIDE

THE FLIPSIDE

I bought my Modesto park around the same time as the Sacramento park and sold them around the same time. So in the same 9 years when I spent $75,600 on City Water in Sacramento, even after replacing the well and adding filtration, and paying 9 years worth of testing and maintenance (at roughly $2,000 per year), my total expense for water was about $45,000. Even after all that, I still saved over $30,000! That works out to $3,333 per year in savings. I sold this park at an 8% Cap Rate, so my park was worth almost $42,000 more because of that savings.

‘JUST MAKE THE TENANTS PAY’

I hear this argument from park owners and would-be park owners all the time. “I don’t have to pay the water bill anyway. I pass it on to them.” So let’s think that one through. Let’s say you’re charging $500 per month to live in your park and another $20 per month for the water. Your tenants are paying $520 total, but you have to send $20 of that to the city to pay for their water. You’re just collecting that part of it, you don’t get to keep it. But what if there wasn’t a water bill? Couldn’t you still charge your tenants $520 in rent and include the water for free? It would cost the tenants the same, but you’d make that extra $20 on every space every month. On a 50-space park, that would put an extra $12,000 in your pocket each year!

‘THE CITY BILLS THEM DIRECT’

Even if the City collects the water bill from your tenants directly, it still costs you money. Because that extra $20/mo your tenants are now sending to the City for their water could be coming to you instead, if you had a well instead of City water. So, no matter how you cut it, City water costs you money.

MHP WELL vs CITY WATER

DO YOUR DUE DILIGENCE

If you are considering buying a MHP with a well, get it inspected by a professional well company, and hopefully the one who dug the well originally and has been servicing it all along. The age of the well is important. If it’s very old, it could have a cast-iron well casing, which rusts out in 25-30 years. If it’s fairly new, it should have a plastic casing which lasts practically forever.

The age, size and condition of the pump, its wiring, tanks and all plumbing are also crucial to trouble-free operation. Have the flow as well as the static water level checked, and the water quality tested by a lab. Get copies of the last several years of each month’s water tests. Talk to the lab that does the tests. Call the County agency that monitors wells and see if there are any outstanding violations on that well. Or better yet, call in the experts. Call me, Sierra Tallone any time at (925) 413-7704 or sierralynntallone@gmail.com. We do this sort of thing all the time.

MHP WELL vs CITY WATER

FINAL ANALYSIS

We make it a rule never not to rule out any park based on all the usual criteria. You’ve probably heard it all before: “Never buy a park with park-owned units, the maintenance will kill you”; (Wrong) “Always be near a big population center”; (Sometimes wrong) and “City water and sewer only, please” (You already know how we feel about that). There are countless examples of great, money-making parks that don’t meet one or more of those criteria. If you limit yourself too much with arbitrary criteria, you never even get to look at the largest slice of the market.

Remember, the MHP Business is a Business first. You’re in it to make money, not to have city water. The numbers tell the story. The numbers matter more than just about anything else. And if the numbers are there, and strong enough, other factors fade in significance. We operate many, many highly successful MHPs that have City Water and/or Septic that have had little or no trouble. Even the ones that do usually come out ahead of the ones with city utilities. When it comes to the question of MHP Well vs City Water, our advice is always to look at the very best deals you can find, not just the best deals that have city water. Call me for more details.

I love talking about this stuff. Sierra Tallone, CCI Investments at (925) 413-7704 or email sierralynntallone@gmail.com. As always, there is no cost or obligation, and no high-pressure.