Author: Ted Boers, Datacomp Appraisal Services
Bio: Ted Boers is the founder of Datacomp Appraisal Services a company that specializes in mobile home values and valuation and operates MHVillage.com which is a website that specializes in the mobile home industry.

A Question of Equity

Why New Home Sales are Low

Many words have been written about why new MH sales are at a record low. If I had to boil it down to as few words as possible I would suggest that it’s “a question of equity” or more accurately “a lack of equity” on the part of MH owners.

Think about it. If it was a well-known fact, that for whatever reason, buyers of Pulte Homes were in a negative equity position for the first 10 years, how many new homes do you think Pulte would sell?

That’s why I believe that the lack of owner equity is our biggest problem. Owners with no equity have little incentive to make their payments. Owners with no equity have little incentive to maintain their property. Owners with no equity have a difficult time selling their home and paying off the lender. . Owners with no equity contributes to the negative image of our product. And worst of all no equity is the primary cause of repossessions.

The obvious question is “Why don’t MH owners have equity?”

To answer that question I would like to introduce you to the Seven Equity Busters.

Equity Buster # 1

Lengthy loan terms, and financing of soft goods.

Solutions:

(a) Shorten Term so that the owner has a chance to build equity – The maximum term should amortize at least 20% of the loan in 7 years. Based on that premise the maximum term for a loan at 8% interest should be 22 years and the maximum term for a loan at 12% should be 19 years.

If the downpayment is over 10%, and is real, the term could be extended.

(b) Balance the downpayment and the financing of soft goods (sales tax, insurance, buy down points etc.) so that there is at least 5% equity on day one.

Equity Buster # 2

New homes sited in locations where they do not belong. (eg a $60,000 home in a community of $15,000 homes.)

Solution:

Loan to location adjusted market value rather than to formula.

Equity Buster # 3

Downpayment Fraud and Misrepresentation.

Solutions:

(a) Do whatever is necessary to verify down payments. (cash or trade-in)

At least 50% of trade in values are grossly overstated.

(b) Loan to market value rather than to formula. At least 20% of new homes include some form of downpayment fraud, which could have been detected if the lender had taken the time to determine market value.

Equity Buster # 4

Lack of quality and service provided by manufacturer, retailer and installer.

Solution:

Create a JD Powers type quality/service rating model for manufacturers, retailers and installers and make it available to industry members and consumers.

Equity Buster # 5

Buyer bought more home than he could afford and as a result could not afford to maintain it.

Solution

Educate the buyer regarding the cost of maintaining a home.

Equity Buster # 6

Community rent increases that reduce home values.

Solution:

Create a JD Powers type rating model for communities that measures rent and maintenance history and make it available to industry members and consumers. Significant points would be awarded to communities that have a long term, reasonable (CPI based) rent guarantees.

Equity Buster # 7

Industry neglect of the existing home market resulting in the lack of availability of financing for pre-owned homes.

Solutions:

(a) Encourage members to aggressively pursue the financing of pre-owned homes at reasonable terms recognizing that the health of the new home market is a function of the health of the existing home market. (MHI can also play a role in recruiting additional lenders to offer financing for pre-owned homes.)

(b) Facilitate the creation of a better system to help MH owners sell their homes. Could be web based. This would also help lenders sell repossessions.