Pre-Owned Manufactured Homes (How to Determine Value)
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.
Pre-Owned Manufactured Homes
How to Determine Value
Historically, the MH industry has used Value Guides to determine the value of a used MH. During the last thirty years the predominant Values Guides have been the Kelly Blue Book, Unicomp and the N.A.D.A. Manufactured Housing Appraisal Guide. Unicomp went out of business in the late seventies and Kelly Blue Book went out of business in the year 2000 meaning that the N.A.D.A. Manufactured Housing Appraisal Guide is now the only MH value guide left on the market.
The N.A.D.A. Manufactured Housing Appraisal Guide includes a directory of manufactured homes by:
- Multi state region
This directory includes approximately 49,000 unique combinations of the above.
For each of these unique combinations the N.A.D.A. Manufactured Housing Appraisal Guide shows a value reference code by year for each of the last 14 years. That increases the unique combinations to 686,000. (There are even value reference codes for new homes produced by manufacturers that went out of business more than 14 years ago.)
Each reference code refers to a page that lists 520 different values for that unique home depending on its actual size. This increases the unique combinations for which the N.A.D.A. Manufactured Housing Appraisal Guide publishes a value to 356,000,000. (There are approximately 8,700,000 existing manufactured homes in the country.)
The values published in the N.A.D.A. Guide (Yellow Page Values) represent the base value of the structure. It does not include adjustments for condition (positive or negative), optional equipment or location (positive or negative).
The basis of the Yellow Page Values published in the N.A.D.A. Guide is the manufacturer’s invoice when the home was new, adjusted to reflect retail markup, and then adjusted over time based on market trends regarding depreciation and appreciation.
The Yellow Page Values printed in the N.A.D.A. Guide are not intended to be used without adjustment. Two adjustment methods are offered; The Book Adjustment Approach and The System Adjustment Approach. Some lenders have created an additional adjustment approach, which we will call the “Mark Up Adjustment Approach”. All adjustment approaches are discussed below.
The Book Adjustment Approach
The Book Adjustment Approach is a rather simplified approach to adjusting the Yellow Page Values based on the state where the home is located, the home’s condition, the community adjustment and the unique package of optional equipment. These adjustments create what the Guide calls the “Average Retail Book Value” of the Home.
As the name applies this approach results in an “average” value not a specific value. For this reason the Book Adjustment Approach should not be used for lending purposes.
The Marked Up Adjustment Approach
This approach, which is favored by some lenders, starts with the Yellow Page value for a particular home and arbitrarily marks it up 40 – 45%. The advantage of this approach is that it is simple to do; no inspection is necessary. The disadvantage is that this approach is seriously inaccurate and typically results in adverse selection to the lender.
The System Adjustment Approach
The System Adjustment Approach consists of a more elaborate process that assumes that the user will actually inspect the home on site. It further allows the user to systematically determine the home’s condition, the desirability of the community and the value of the unique package of components and accessories. The Yellow Page Value is then adjusted positively or negatively based on these observations. These adjustments create what the System Worksheet calls the “Cost Approach Value” of the Home.
The System Approach also allows the user to convert the Cost Approach Value to a Market Value based on local comparable sales. Although NADA recommends adjusting the Cost Approach Value to a Market Value based on local comparable sales most lenders who use the NADA approach do not adjust to market because:
- Local comparable sales data is generally not available.
- Market adjustments tend to lower the values.
- Some lenders fear that comparable sales in certain high priced markets will result in overstating the value of the home being appraised.
Datacomp believes that lenders who rely on a Cost Approach Value rather than Market Value are making a very serious error.
Our reasons are as follows:
1. Cost Approach Value assumes all housing markets in a state are the same.
The Cost Approach Value includes an adjustment for region and state but not for the local housing market. Therefore it assumes that all housing markets in a state are equal. That’s like asking, “How much is a 3BR home in a nice neighborhood in Ohio worth?” We know that there can be as much as a 40% difference in housing values from one housing market to another within the same state.
2. Cost Approach Value often results in the user guessing at make, model, series.
Cost Approach Value, is based on the Make, Model and Series of the home. The title to the home typically only shows the Make. 50% of the time it is impossible to determine the Model or the Series. Guessing at the model and or the series can result in the value being seriously overstated or understated.
3. Cost Approach Value is based on broad appreciation/depreciation trends.
The 8.7 million MHs in this country consist of thousands of year/make/model series combinations. Keeping track of what all these homes are worth is impossible. Instead NADA has historically tracked what manufacturers typically charged retailers for their homes, applied a retail mark-up and then increased or decreased that value over time based on broad appreciation and depreciation trends around the country.
Obviously this results in a very broad and at best approximate estimate of value. When determining collateral value for lending purposes +/- 20% is not close enough!
4. Cost Approach Values tend to have a very sporadic relationship to actual selling prices.
When we compare Cost Approach Values to actual selling prices it is apparent that there is a very sporadic relationship between the two. (See Graph 1) This is very different from the relationship we would expect since both value and selling price reflect Market Value most of the time. This sporadic relationship is a direct consequence of applying broad appreciation and depreciation trends over a period of many years. The relationship is so sporadic that in situations where the Cost Approach Value is greater than sales price it is on average 36% greater. For situations where it is less than sales price it is on average 21% less.
5. Cost Approach Values frequently do not reflect the marketplace.
In 1997, Datacomp considered the Cost Approach Values to be too high. We felt that the high values afforded lenders little protection against loans on homes that were over priced. Also, the high and sporadic values created the potential for over-advancing on refi’s.
In 2001 Datacomp has become increasingly concerned about the Cost Approach Values because NADA has reduced their values by 35 – 39% across the board, over the last four years. The actual annual adjustments per year were:
It is very possible that today the Cost Approach Values are too low and are, to the extent that lenders rely them on, causing repossessions and arson.
6. Current Cost Approach Values tend to be too high for low priced homes and too low for higher priced homes.
An in depth analysis of the relationship between Cost Approach Value and sales price in 2001 reveals that NADA’s curve of values is seriously skewed. When we dissect the reject ratio by sales price range we learn that Cost Approach Values rejects 0% of homes under a $15,000 sales price, 19% between $15,000 – $30,000 sales price, and 47% of homes with sales prices over $30,000. This means that lenders who rely on Cost Approach Values are adversely selecting against themselves. Low priced homes, which are typically older, smaller, in poor condition and in poor locations qualify for financing. Higher priced homes which are newer, bigger, in better condition and in a better location end up being rejected.
Based on the above analysis Datacomp strongly recommends that lenders use Market Value rather than Cost Approach Value to determine collateral value.