Author: Dan Rinzema, Datacomp Appraisal Services
Bio: Dan Rinzema is president 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.

Developing with Manufactured Housing

Surviving in the New World

Ever get nostalgic for the “good old days” when nearly every deal was a “home run,” included all the extras, and financing was only a formality based on a “formula”? Now fast forward to Summer 2002, new home chattel sales have all but dried up and lenders have become your biggest competition as their repossessions flood the market. Financing has become a mine field and the fastest growing segment of the manufactured housing industry is mortgage financed homes placed on private property.

Gone are the formulas based on an arbitrary percentage of the manufacture’s invoice. Gone is the “land/home package” that, when complete, was rarely representative of what was actually taking place in the active real estate market. Gone too, are the days when all you had to do was deliver a home to the purchaser’s property, provide a minimum of “set-up” and then drive away. Today’s sophisticated and demanding financing requirements, local and state building codes, coupled with the costs associated with project coordination demand a new, in-depth, knowledge not required in past years. The ability to coordinate each aspect of a project and “deliver the goods” is critical to successful (and profitable) single site development in today’s new environment.

Control of the retail sales process has shifted dramatically in recent months as retailers and the lending community attempt to meet the ever growing demand for home placements on real estate. Lenders crippled by underperforming portfolios and a landslide of repossessions and foreclosures have been driven to the stringent underwriting guidelines of the secondary mortgage market in a effort to regain lost profitability (and perhaps credibility). Borrowers too have seated some control as they demand lower interest rates, more quality and higher service levels for their money. This new level of accountability has strained many a “good-ol’-boy” network, not to mention the bottom line.

One particular aspect of this “new world” that appears to be receiving substantial attention is the appraisal process and the relationship this process has to the overall success or failure of a given transaction. Vacant land appraisals married to a “book” value for the home or a formula based on manufacturer’s invoice have given way to more conventional, comparable sales based appraisal methods.

Lenders, for the most part view this traditional method of estimating value to more accurately reflect what is taking place in an open and active real estate market. The secondary mortgage markets, Fannie Mae and Freddie Mac and HUD have long advocated the application of what is commonly called the Sales Comparison Approach to Value or Market Based Appraisal.

The theory behind a market based appraisal is founded on the assumption that a typical buyer will tend not to pay more for a given home when a substitute home similar in utility and appeal is available in an active market. The impact that a market based appraisal has on the single site development process can be significant. Retailers, contractors and developers who ignore this dynamic run the risk of perhaps over-improving or under-improving a particular site. The penalty for such miscalculations can be costly, over-improve a site with too large a home, loaded with extras when no sales of similar homes are available for comparison and the home may not appraise for the purchase price. Under-improve a site and the retailer, developer misses a golden opportunity to maximize his/her profit potential.

Harsh as this may sound the individual market, not the retailer, now determines what a proposed single-site manufactured home project is “worth” when compared to recent sales in a given area. While the overall cost of a project remains a factor, the process of determining value based on comparable sales and other market dynamics has become the new “eight hundred pound gorilla “ in the financing arena.

Retailers must be quick to identify any market forces that may negatively impact a planned project. Poor location is one of the primary factors that can destroy a project before the ink is dry on the purchase agreement. Placing a home on land in a economically struggling area where home prices have been falling or on a undesirable piece of property can lower the probability that the valuation of the project, by the appraiser, will meet the retailers or borrowers expectations. On the positive side, a well planned project includes a manufactured home that closely conforms to existing neighborhood standards both ascetically and functionally. We have all heard the old adage that the three most important factors one must consider when buying real estate is location, location ,location, successful contractors, developers and retailers live by this credo.

One market force that may be overlooked during the planning stages of a given project is “competition”. At one time a manufactured housing retailer knew his/her competition well, it was every other manufactured housing dealership across the street, across the county or region. Each dealer knew what the competiion was charging for specific models, delivery and setup. Today’s single-site development requires retailers to be keenly aware not only of their traditional rivals but trends in the prevailing real estate and housing markets. A flood of manufactured home foreclosures can depress the market for new homes and perhaps attach a stigma to owning a manufactured home in general, thus forcing down home prices. Like it or not these homes are your competition and so is every manufactured or site-built home that offers similar utility and appeal that may be for sale in the market.

The ability to satisfying the public’s demand for affordable manufactured housing on private property could be the industry’s savior in these difficult times . Successful retailers who have watched this particular market segment expand dramatically over the past few years have adjusted quickly to the new lender and secondary mortgage market requirements. Traditional retail practices are slowly being replaced as retailers develop successful single-site development strategies. Dealers who thoroughly analyze prevailing housing markets have moved away from the temptation to “loading up a transaction” in favor of a more realistic market value approach. By concentrating on what home values are supported in a given market the retailer has an opportunity to direct the borrower to the style and model of home that complements a particular location.

This discussion only scratches the surface of what must appear to be an overly complicated process, the keys to successful, and profitable single-site manufactured housing development lies in the many details. Realtors, contractors and developers in the site-built universe have recognized these concepts and applied them successfully for years.