Facts and Figures
There are millions of manufactured housing units in existence in North America. The 2000 Census registered almost 9 million mobile home units in the United States, and this number is consistently on the rise. In fact, Mobile Homes have been the fastest growing type of housing, increasing from 315,000 mobile homes existing in the 1950s, to the nearly nine million in existence today. More recent statistics compiled by the Institute for Building Technology and Safety, show that there were over 770,000 units sold just in five years (2001 through 2005). The used mobile home resale marketplace generated over 400,000 new first position notes ANNUALLY, from 1996 through 2000. This figure works out to about $6 billion dollars of notes being added to the private paper markets every year. The quality of manufactured housing continues to improve and become more attractive to first-time homeowners or retirees looking to “downsize” and simplify. As a result, the past trends in the strength of manufactured home sales show no signs of letting up.
Definitions
First of all, let’s talk about what we mean by “manufactured housing.” Sometimes manufactured homes are referred to as mobile homes, and abbreviated “MH,” manufactured housing is what used to be referred to as “trailers” or “house trailers.” Manufactured homes or housing are residential structures that are built in factories as “units” rather than being “site built” from raw materials like most SFRs. After it is assembled in the factory, a manufactured home is then transported to the desired location by truck and set up for habitation there.
While the term “mobile home” implies that these houses tend to move around, ironically, their locations are usually pre-determined and quite fixed, usually for the loge of the structure. However, these housing units are built on a permanent frame – one that accommodates axles, wheels, and a tow hitch – to allow it to travel.
Today, the two main sub-categories of manufactured homes are “singlewides” and “doublewides.” Singlewide homes (AKA as “single section”) are typically between twelve and sixteen feet wide and can be towed to their site as a single unit. Doublewide units are at least twenty-four feet and are moved to their location in two separate units. They are then connected together at the housing site. A typical dimension of a singlewide MH floor plan might be 14’ by 70’, whereas doublewides might be shorter – say 60’ – but obviously wider, 24’ or more.
There are even triple wide homes available, although these are not nearly as common as singles and doubles. For many manufactured home buyers, the appeal lies in the low cost of entry for home ownership. Buying a MH unit is often billed as a better alternative to renting an apartment. However, one significant difference between mobile homes and site-built or “stick built” homes is that mobile homes tend to depreciate steadily and relatively rapidly with age, as opposed to traditional site-built homes which often see their values climb over time.
The depreciation factor on manufactured housing means that mortgage terms on these properties are often a lot shorter than the typical 30-year mortgage common to the conventional home loan market. Interest rates are usually higher too. Manufactured housing notes are typically secured by either a manufactured home on land, or in a park or MH “community.” If the note is also secured by the land the manufactured home is sitting on, and the home is permanently attached to the real estate, that note is usually considered a “real estate” note, and is generally treated more like a note secured by a single family residence. If the manufactured home is sitting on leased land, or if the home is situated on a leased space in a mobile home park (“manufactured home community”), then the note is called a “freestanding” MH note.
Because your interest in notes should revolve primarily around notes secured by real estate, you clearly should focus on MH notes that are permanently attached to land and that include land in their deed. I’ll explain more in detail later about this critical difference – whether the MH property includes land or not.
A Quick Note about Modular Housing
Please be careful not to confuse mobile homes or manufactured housing with “modular housing.” While they share the trait of being constructed in factories rather than on-site like a “stick built” home, they’re completely different.
A modular home gets transported to its intended location in pre-built sections on the back of a tractor-trailer truck, much like a doublewide mobile home. Modular homes, however, can resemble site-built houses and have complex designs – even multiple stories. Most people would not be able to tell a modular home from a site-built construction after it’s assembled. Because of the additional complexity, modular homes are put together and completed by contractors on-site. Modular homes are subject to building inspections to ensure that the structure meets safety requirements and that all finish work on the modular home is performed correctly. A well-built modular home generally has equal strength and longevity as a site-built home, and will usually increase in value over time. Modular housing units are typically treated the same as site-built SFRs when they act as security property for private notes.
Key Issue Specific to MH Property
All mobile homes that act as security for a cash flow must be physically attached to the land in order for most buyers to consider purchasing that note. Since the only MH notes you’re interested in finding include land, the home itself must be “permanently” connected to the land to ensure that it is likely to stay put. The nature of manufactured housing means that mobile homes are never truly attached to the land permanently – they are, after all, designed to be mobile! Manufactured homes that are set up “to stay” are typically placed on concrete slabs and connected to city water, power and utilities. Permanent foundations are generally one of three types: a concrete slab, a cinder block stem wall, or a poured concrete footing. In all cases, tongue, axles, and chassis are removed, leaving the home on its main frame only. Verifying that the residence is properly attached to the ground is not something you have to be concerned with when dealing with a Single Family Residence note. It is just about impossible to move a site-built house.
Other Important Points for MH Properties
Size of Land Plot
If the note includes land, and it is a real estate MH note, make sure to find out what the size of the plot is. It never hurts to get an idea of what the neighborhood is like too. For example, is it in a well-developed residential suburban area, or is it out in a rural area far from an urban center?
Type and Size of MH
Remember, the value of the note security is always important. In the MH note markets, valuations are based on references to the NADA Manufactured Housing Appraisal Guide as well as the value of the land attached. This guidebook to mobile home values provides buyers with an objective reference point to gauge property value. In order to do so, however, MH buyers must know the year, make, model, and size of the home in question.
Payor’s Credit Score
Since credit scores of MH unit occupants could be lower than with SFR property, knowing the payor’s credit score is vital. It never hurts to run a credit report now rather than later when considering selling a MH note.
Remember, these are the additional points that buyers will consider for a mobile home note.
- How much land is included with the mobile home? (More land is usually better)
- What are the make, model and year of the unit? (Newer mobile homes are better)
- What is the size of the mobile home? (Doublewide mobile homes are much more desirable.)
- What is the credit score of the payor? (Higher is better.)
Is a MH With Land “Real Property”?
Generally speaking, a MH note that includes real estate (i.e., land) is a good thing. But from a note buyer’s standpoint, there is a legal matter regarding the way the home is titled that is of great importance. In the eyes of many state governments, a mobile home with its wheels removed and that is permanently attached with a concrete or masonry foundation could still not be legally connected to the land. Most states treat mobile homes officially as “personal property.” Personal property refers to an asset or property (other than real estate) owned by an individual. This goes for the biggest states like California, Texas, and Florida.
In most areas of the U.S., manufactured housing property is treated more like a car than a house on land, and therefore the process of foreclosing on a mobile home can be quite different. This is because it is typically more difficult to obtain legal authority to take back or repossess personal property than a house and land. This can prevent title companies from issuing the title insurance on manufactured housing that is required by almost all note buyers. As a result, many buyers will not buy mobile homes that are not listed as “real property,” or “real estate.” Real estate refers to a parcel of land and any buildings or structures on it. Site-built houses (SFRs) are considered to be “real estate.”
A good way to tell if the MH and land are considered real property or not is to examine tax records of the local county. If it is on the county tax rolls (a list of taxable property) as “improved” land, and the MH shows up in the county’s description of the property in the county tax rolls too, then you are dealing with real estate. This holds true even if the land and note were originally titled as two separate properties, or if there were separate loans on each of those properties.
Deal Makers…
The following are benchmarks based on research conducted. Keep in mind, however, that every situation is unique and every note purchaser sets their own criteria as to what kind of note on which they will make offers. These are only general guidelines and are flexible, depending on the unique specifics of each individual note.
These six characteristics are usually favorable for MH notes:
- Down payment of at least 10% or better. Just as in any other note, more money put down at the time of sale means more equity and less risk to the end buyer.
- Term of 15 years or less. Shorter terms minimize the chance of a MH property’s value depreciating faster than the note balance.
- Interest rates of 12% to 16% on the paper. Too low of an interest rate means any offers will involve a very steep discount, while too high of an interest rate could indicate that the buyer (payor) was desperate to get into a home – any home – and that their credit is poor or non-existent.
- MH notes that are in first position. Senior position notes have the most security value.
- Paper with at least four to six monthly payments already made. Most note buyers prefer at least 12 months of payment history. It may be harder to find a buyer for a MH note with less than four months of seasoning, especially if it doesn’t have any other good points to compensate for the lack of payment history. Two to three years of seasoning is most desirable when dealing with MH paper.
- Doublewides built after 1982 are preferred by note buyers, and the best MH properties are 15 years old or newer. This “rule” is relative though, as notes secured by singlewides and older homes can be sold too, but with a heavier discount.
Deal Breakers…
These are some general conditions that should raise a “red flag.”
These seven characteristics are usually unfavorable for MH notes:
- Less than 10% down payment at the time of sale, especially if the note has less than 12 months of seasoning. This is especially bad if combined with an older home (20 years or older) as collateral, and/or weaker payor’s credit (below 550).
- Home sold at an inflated purchase price relative to NADA Appraisal Guide (unless qualified appraisal confirms value). Basically, having an artificially high sales price can mean that the value of the unit might drop below the balance of the note.
- Home older than 1976, unless there’s proof of extensive rehab or renovation, and there’s “supporting documentation” in the form of a recent appraisal.
- Unit is on leased land, or the payor has a separate loan to pay for the land. Either way, the status of the note buyer’s security (the MH) is questionable if something goes wrong with the payments for the land. If the payor suffers a foreclosure or gets evicted, the payor would then have to vacate the land. If the payor doesn’t have the means to move the MH, or no place to move it to, the payor could end up abandoning the home.
- Interest rate on note is above 16%, or term is longer than 12-15 years. A longer term increases the chance that the MH property will depreciate faster than the payoff amount on the note, which makes the MH of limited value as security for the note. Some exceptions are possible if the note has great equity or includes valuable land.
- Balloon payment note. Because purchasing a mobile home note is already a little higher risk than a traditional SFR note, adding a balloon note into that mix makes it doubly risky.
- Note balance under $10,000.
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