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May 19, 2003, Revised February 14,
2005
What Is a
Manufactured House?
A manufactured home is built entirely in a
factory, transported to a site, and installed there. It is distinguished from
"modular", "panelized", and "pre-cut" homes, which
are also factory built but assembled on the site.
Manufactured houses usually are built without
knowing where they will be sited, and are subject to a Federal building code
administered by HUD. The other types of factory-built housing are not assembled
until the site is identified, and they must comply with the local, state or
regional building codes that apply to that site. These other types of
factory-built houses are financed in the same way as houses constructed entirely
on-site.
Manufactured
Housing May Not Be Eligible For Mainstream Financing
"I am purchasing a top-of-the-line
manufactured house, but I am being offered bottom-of-the-line financing, even
though my credit is pretty good. They want 8-9% when other mortgages are going
for 5-6%. How come?"
Most purchasers of manufactured housing,
including you, are shut out of the mainstream mortgage market. They must find
loans in a parallel market, which is much like the unsecured personal loan
market. Lenders in this parallel market assume that loss rates on manufactured
house loans will be high, as they are on personal loans, and they price them
accordingly. They view manufactured houses as poor collateral that provides them
with little protection.
One reason for this view is that manufactured
houses can be moved. Before the HUD building code went into effect in 1976,
manufactured houses were called "mobile homes", and this term is still
widely used. Even though few ever leave their first site, they remain tarnished
by the image of mobility.
Lender concern that the collateral can
disappear is well grounded when the house sits on rented land, which is the case
for about half of all manufactured houses. Most leases are short, and if the
landowner decides that it is more profitable to use the land in some other way,
the manufactured house owner must move it or leave it. Since the cost of moving
is very high, and in many cases the property is worth little more than the debt,
owners sometimes just walk away. The lender's collateral ends up in the trash
heap.
Few owners of manufactured houses have built
equity the way owners of site-built houses do. (Equity is property value less
debt on the property). A major part of the appreciation in the value of
site-built houses is due to rising land values. If you don't own the land, you
don't realize this benefit. Furthermore, many purchasers of manufactured houses
began with no or negative equity, putting nothing down, and including settlement
costs (and sometimes furniture and insurance) in the loan.
In addition, manufactured houses seem to have
more defects than site-built homes. Because they are geared to low-income
purchasers, the materials used have often been inferior. Sometimes mishaps occur
in moving houses from factory to site, and sometimes the installation is
defective.
Many manufactured houses are not anchored
securely to their foundations, making them extremely vulnerable to natural
disasters. Hurricane Andrew in 1992 destroyed almost all of the manufactured
houses in its path, compared to about one-third of houses built on-site.
Getting defects in a manufactured house fixed
can be a hassle because responsibility is divided and finger pointing is common.
The factory owner says the mover did it, the mover says the installer did it,
and the installer says it happened at the factory.
According to Consumers Union, about 12% of
all manufactured home loans end up in default. This is about four times as high
as defaults on mortgages secured by homes built on-site. In 2002, the largest
lender on manufactured houses, Conseco, was forced into bankruptcy after losing
about $4 billion in two years.
Better News About
Manufactured Housing
Despite these numerous problems, manufactured
housing provides an important source of affordable housing, especially in the
south and in rural areas. Because of efficiencies in factory production,
manufactured houses cost significantly less per square foot than housing
constructed on-site. Further, there are some bright spots in the picture.
Community groups and foundations have begun
to focus attention on manufactured housing because they see it as an important
way to provide decent housing to low-income families. Laws have been passed in
some states to give residents of rental parks more legal rights. In New
Hampshire, residents of some parks have banded together to form co-ops, which
have purchased the parks. There is a National Foundation of Manufactured Home
Owners, which can refer buyers to a local chapter in the area.
An increasing number of purchasers are
middle-class retirees living in cities and suburban areas, who own their own
land. It is estimated that about 2/3 of all purchasers today are landowners.
It is possible, furthermore, to purchase a
manufactured house, install it permanently on your own land, and qualify for
mainstream mortgage financing. It is even possible to do it under a lease,
provided the lease is long enough and provides adequate legal protections to the
house owner and lender. Mainstream financing remains small but it is growing.
The quality of manufactured housing,
including the quality of installations, is also improving. In 2000, Congress
passed the Manufactured Housing Improvement Act (MHIA), which provided an
improved system for keeping the HUD building code up to date, and required
states to improve the quality of installation and to set up dispute resolution
programs. The status of state compliance is summarized in Implementation
of MHI Act of 2000.
In California, some developers have used
manufactured housing in lieu of on-site construction, marketing and financing
them in the same way. This avoids many of the problems referred to above
that have tarnished the industry.
Tips on
Purchasing a Manufactured House
Yet hazards remain for the unwary. Here are
some guidelines for avoiding them.
Do not buy a home from a dealer in a package
that includes installation, site, and financing.
Tempting as it may be, one-stop shopping in this market is a sure-fire recipe
for over-paying and not getting what you want. Take it one step at a time. It is
easiest to compare the houses offered by different dealers if the price applies
only to the house. Bundling muddies the waters.
Find the site first.
Before I did anything else, I would decide where I want my house, and whether on
rented or owned land. If your credit is good and you have enough cash to buy
your own plot, you will be eligible for mainstream mortgage financing. The
savings in financing costs and in rent, if converted into a "present
value", will probably be well in excess of the cost of the land.
If you rent because you can't find a plot or
don't have the cash to buy one, but your credit is good, you may still be
eligible for mainstream financing. This requires that you obtain a proper lease,
which is one that has a term of at least 5 years, and provides the other legal
protections required by lenders.
Freddie Mac will buy mortgages on
manufactured houses secured by leaseholds in some but not all states.
Freddie�s requirements are complicated and you may need a lawyer to determine
whether any particular lease is in compliance.
If you can't purchase a plot or obtain an
eligible lease, you will be obliged to settle for personal loan-type financing,
paying 2-3% more. Even so, you will want to pay careful attention to the lease
terms, which can vary widely. If you accept a monthly term, or the landlord's
right to approve a purchaser, you will be at the landlord's mercy. Before you
sign, talk to residents of the park about their experience.
Get a warranty on installation:
Installation of manufactured houses remains trouble-prone. The dealer may want
to include installation in the price. That is one type of bundling that makes
sense, provided the dealer assumes responsibility with a strong warranty. If the
dealer includes installation in the price but will not provide an adequate
warranty, either ask for a price without installation, or walk.
If you buy the house without installation,
you have to hire an installer yourself. This is no small matter, which is why so
few buyers do it. The MHIA requires states to develop installation programs that
include installation standards, training and licensing of installers, and
inspections, but compliance has been spotty. Check your own state from the
spreadsheet here. In addition, ask local
owners for recommendations, ask installers for references, and make sure they
are insured.
Arrange your own financing:
The dealer will try to package financing into the deal. He can get you approved
fast and easy, which is an attractive lure. If you can qualify for mainstream
financing, however, you will do better to find your own loan. If you don't
qualify, it might not matter.
Check this web site for more information:
www.consumersunion.org/mh.
Copyright Jack Guttentag 2005
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