Anyone ever work with pre-fab homes? - Posted by Mike

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Posted by ray@lcorn on September 23, 2000 at 14:18:49:

Mike,

This is surprisingly similar to a post that was written here about a year ago. I saved the post because I wrote an extensive reply that drew on my experience in building over 100 modular houses. I am still active in the industry and have a current project that uses modulars.

I’m going to copy my reply to the earlier post below, so read it with the knowledge that there are some comments specific to the deal that was presented in the original post. However your role in this transaction strikes me to be very similar… I don’t think you are entering the right side of the business to truly profit.

After that, I am going to post separately a copy of an article that is in my files about modular housing.
These are both long posts, but I think you would benefit from the information. let me know if I can help further. I host the commercial discussion forum here on CRE Oline, and would welcome you to discuss this deal there. We have a number of experienced builders and developers that frequent the commercial forum and I think you could gather more insights there as well.

ray

copied post****

Posted by ray@lcorn on November 08, 1999 at 12:05:48:

In Reply to: Buying Land and Building w/Modulars posted by Ed (Phila) on November 07, 1999 at
13:49:00:

Ed,

Like Phil, I’ve “been there, done it.” I was a modular builder for about a dozen years. I didn’t quit because I was making so much money I couldn’t find a place to put it.

A few observations:

First, there is absolutely NO way I would count on a realtor, any realtor, for my zoning and permits. I may be a control freak, but in my experience a realtor has too much going on just trying to make a living to give the permitting and zoning process the attention it needs. Which brings up another issue… if the land you are looking at isn’t already zoned properly, then you just added about two months to the due diligence process. Buy it only subject to zoning approvals (if you are still so inclined after reading the rest of this post).

Second, you need to realize where you are in the food chain. With a landowner (seller), a realtor, a modular manufacturer, and a builder involved, you should ask yourself the question “What do they need me for?” The answer to that question is simple… your money or your access to money. Understand that while all these people are willing to make your investment painless and as management free as you would like, at no point have any of them offered to work for free. I wouldn’t either, and I would guess, neither would you. Each of these parties must profit to continue in business, and rightly so. They are providing a service to their customer. In fact, you are the perfect customer… you don’t know much about the process, have plenty of cash and/or credit, and are willing to turn both over to intermediaries to use as they see fit, and you won’t be living in the house, which means their warranties expire when you sell the house. Make no mistake that each will profit regardless of whether you do or not. In this scenario, I would want to be any of the above parties but you. The land seller gets his/her profit when you close. The realtor is guaranteed of two commissions, one on the land sale and one on the house. The modular manufacturer gets their profit when they deliver the boxes. The builder is getting a cost and risk free line of credit for construction loans, and a guaranteed profit going in. You, my friend, are last in line, and as such will be the one to bear the brunt of any market hiccups, cost overruns (I’d bet on that) and closing concessions/warranties to the retail buyer.

When I was building, I found landowners that were motivated to sell to me below market on a subordinated basis; I bought the house packages direct from the manufacturer at the lowest wholesale cost including volume discounts; I controlled the zoning, permitting, and building process from start to finish; and I sold the houses (in the rare case they weren’t pre-sold) through open listings, reserving the right to sell them myself without commissions being due. The realtors didn’t like it, but it wasn’t their money and credit on the line, and I did a lot more marketing than they would ever do. And with all this control, I counted myself lucky if I netted 10% on the deal. Tough way not to make a living. You’re looking to net 10% and do none of the work. I’m skeptical, to put it mildly.

Third, I question the numbers you related. I’m not familiar with your market, but there are a couple of things that just don’t change regardless of market. Most builders and appraisers will tell you that an average ratio of lot to finished house cost (retail) will be between 5:1 and 6:1. That is to say that if the final retail price of the house is projected to be $300,000, then the lot shouldn’t cost over $50-$60,000. (300,000/5 or 6) It takes a strong market to justify 6:1, and an exceptional one to justify 5:1. Your deal as described is at a 3:1 ratio, which in my experience is unattainable. There are a lot of reasons for this to hold true, the explanation of which is too long to go into here. But don’t take my word for it, call up a DISINTERESTED third party such as an appraiser or a lender and see what they say.

Finally, I would question your assumption of 80% financing. Most residential construction loans are done on a 100% of improvements basis, which is to say unless you are the end user (i.e. retail buyer with a permanent loan commitment), they don’t finance the land. That is why it was important to me to get the land subordinated to a construction loan. This may or may not hold true for your finance source, but I would be very careful to check these facts from the source, and not take information from the realtor and builder at face value. Also understand at what point you will be asked for loan curtailments. The lender will want to be out of the deal entirely in one year, regardless of whether you have sold the house.

As to modular housing as a housing type, I couldn’t be more positive. They are hands down the strongest and most well built house available anywhere. There are inherent limitations as to design because of the use of sections, but the manufacturing process of the house itself is far superior to site built housing. Contrary to popular belief, there is no real cost savings on hard costs. The savings accrue in speed, and as such are entirely dependent on the skill of the contractor doing the field finish work. Modulars require some expertise not usually required in site building because of the exacting standards under which they are produced. For example, foundations musty be built within one-half inch of square, and one quarter inch of level. Many block masons will laugh at that kind of accuracy. They are used to site built standards with an inch or more of leeway in both directions, because the builder can “make it up” as he takes the structure to the roof. On a modular, the sections either fit or they don’t, and when the crane pulls out, those boxes are tough to move. So as a result, the quality of the finished product is very dependent on the skill level and experience of the contractor. There are also special considerations in the electrical, plumbing and HVAC systems that are unique to the breed.

The only ways I have found to really make money in residential building was to either do all pre-sold, price guaranteed contracts with change order provisions, or to control the land, building and sales function. We are currently doing a project by the latter. We bought undeveloped land, built a subdivision, have an experienced modular builder to build at cost, and will market the lot/home packages on open listings with a friendly realtor to give us exposure on MLS. All we are giving up is the volume discount from the modular manufacturer, but I know exaclty what that is and am content to let the builder have it. We will subordinante the lot cost to the builder’s construction loan, and will be out of the loop when the retail deal closes. And with all that control, it remains to be seen how much profit will actually hit the table.

So take a real hard look at this “deal”. From my seat, you are a buyer, not an investor. Hope this gives you some things to think about.

ray

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Anyone ever work with pre-fab homes? - Posted by Mike

Posted by Mike on September 22, 2000 at 09:57:47:

Hi.

A business associate approached me yesterday because he is interested in doing a few deals that involve pre-fab homes. He has got contracts on a few vacant lots and has a contact setup with a factory that builds the homes. We know each other through a contractor that I’ve used on several rehab projects, so we have a contractor that can put house together on the lots. I’ve, of course, got to do my due diligence in the area to determine the profitability of a venture like this. But, I was hoping to get some feedback from anyone out there that has done deals like these. What pitfalls should I be aware of? What questions should I ask before getting involved in this business?

Any help is greatly appreciated.

Thanks.

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Article on modulars - Posted by ray@lcorn

Posted by ray@lcorn on September 23, 2000 at 14:22:53:

This is an article from my files regarding the benefits and advantages to building with modular houses. I didn’t write it, and do not have the authors name for attribution. It is informative, but it is written from the perspective of someone in the industry selling the idea to those like you. So be aware that the bias is for the use of modulars, and as such it does not discuss some of the pitfalls.

Hope you find it informative.

ray

Modular House Benefits
Ten Money-Saving Benefits of Manufactured Houses: Author Unknown

The factory-made house is a technological accomplishment that was long overdue. The handmade stick-built house, by contrast, is as much an anomaly from the dark ages as light from a candle.
Still, the art of efficient mass production of houses in factories is still being perfected. It’s in a relatively early stage of its development. Improvements are coming, so don’t expect a perfect product now or a rockbottom price, or both. At this stage of its development, though, the factory house is a big step forward for homebuyers with the following major benefits.

High-Quality Construction
This ranks well up there in importance with money savings. Top grade lumber is used in nearly all factory made houses, largely because second grade lumber can cause problems with the precision techniques in the plant and thereby slow down production. Most factory houses also are built to conform with the toughest building codes. See Figure 3.1. Special rigidity and toughness also must be built into factory houses because of the nature of factory house production, and
particularly to withstand the bouncing around encountered during over-the-road shipment. Practically no stick-built house could stay together, for example, after being lifted into the air and dropped a few times, but many factory houses can. Such strength is overkill, you might say, since Paul Bunyan is not likely to pick up a house, like a ball, and bounce it around. Right? Wrong. Such punishment could be dished out by a twister, a landslide or an earthquake, and many a factory house can take such a punch like a champion boxer.

For example, not long ago a modular house was delivered to its site too late in the day to be anchored down. A tornado lifted the house in the air, spinning it around three times before dropping it to the ground. Peering from their storm cellar, the people next door saw it happen. The next day the assembly crew found the house intact except for dents and broken windows. The house was hauled back in placeit had landed halfway off the foundation and was anchored down. The dents were repaired, glass was replaced and the house was as good as new. It has been occupied ever since. The maker of the house says that’s his answer to the Wizard of Oz. Another highquality feature with welcome results is the kiln dried lumber (pre-dried) used in factory houses. One couple did not know about this until a year after moving into their new factory house. A relative in the construction business said, “It’s amazing. You have no cracks in your walls. When my new house was a year old, there were cracks all over because of the wood drying out.” That doesn’t happen to a factory house because the pre-dried wood does not shrink and warp as a result of uneven drying. Pre-dried wood also means no squeaky floors and no bulging walls and popping nails.

High-Quality design
Don’t underestimate this one either. A sad fact of life in homebuilding is that professional architects are hired to design only a small minority, perhaps 15 percent of all conventionally built houses in the United States, according to the American Institute of Architects (AIA). Alas, the haphazard results show it. Many manufactured houses, on the other hand, are designed by architects, including topnotch residential architects. The manufactured house comes with better breeding, which shows in both form and function. That can mean better long-term value, in other words, higher resale value, as well as the day-to-day benefits of living in a better house.

A Factory House Is No Pig In A Poke
You know what you’re getting and thus no painful surprises later. The same house has been built before and the bugs ironed out. You can often see exactly what you will get by visiting the same house on modelhouse row outside the factory, or by visiting a previous buyer who owns one. A number of manufacturers will gladly give you the names and addresses of people who have bought homes from them. Beware of the manufacturers who will not. Call, or better yet, visit a few. This can pay off well, since you can find out firsthand how the house has worked out. What should you know before you buy? Are there any shortcomings? Any problems to avoid? A past buyer can answer such questions.

Known Sales Price
The price of a factory house is, unlike putty, usually firm. Few gremlins are likely to torpedo your building costs. Like other consumer products with fixed price tags, it’s usually easy to put a firm price on a factory house and stick to it. As many homebuyers ruefully say, building or buying a new stick-built house often involves paying extra for cost overruns. (These are not always the builder’s fault. They’re often due to the crazy quilt nature of stick-built construction.)

Building Time Is Sharply Reduced
A factory house often can be delivered and ready to occupy within a month or two months after it’s ordered. Sometimes it can be as little as a week or three after the foundation has been completed and the house delivered. That’s significant compared with the usual four to six month completion time for a stick-built house. Getting a stick-built house finished even in six months can sometimes be cause for rejoicing, as many a wait-weary buyer can attest. The time saved on a factory house can mean lower interest costs for the construction loan required to build a house. That’s the money that a builder or buyer must usually borrow to finance the building of a house, and a higher interest rate is charged for it than for mortgage loans (which buyers use to finance the purchase of the completed house). This can add up to four-figure savings. Building overhead costs are clearly lower when a house is finished faster. True, these and other construction savings may be builder costs that end up in the builder’s pocket. But just as practically every building cost for a new house is paid for in one way or another by the buyer, savings made are also reflected in the bottom line, i.e., they too usually come back to the buyer. And more directly, the buyer saves by moving into the new house faster, thus leaving behind his or her existing house sooner.

Made-to-order House Packages
Some manufacturers will on order turn out a house package built according to a buyer’s plans and specifications. They are called custom manufacturers. Each will make custom house packages for individual homebuyers, including enough houses to stock a new development for a builder. There are also catalog manufacturers, who turn out a line of houses shown in their catalogs. You may buy any one, often with optional changes, if desired. Many makers will also modify their standard plans on request, though generally this costs extra. Some manufacturers do both. They make their own line of houses shown in their catalogs and on request produce custom house packages for buyers.

Easy Financing
Many banks and other mortgage lenders readily approve a mortgage loan on a factory house because the house has been evaluated and financed before. The factory house generally comes with better credentials, including certificates of approval by state, regional and national building codes. The house construction is clearly acceptable. A buyer might also be blessed with favorable terms, and the mortgage application ordinarily sails through processing. Like any mortgage, the pain comes later when you must pay it back every month.

Building Your Own Factory House From A Kit Is Practically Child’s Play
Okay, it’s still hard work. But it’s considerably easier than building a stick-built house. And, as we noted in Chapter 2, homebuyers can practically call their own signals and pay the manufacturer only for a half-completed shell house, and complete that or any other part of the construction with their own moneysaving labor.

Reduced Theft and Vandalism during Construction
As we mentioned in Chapter 2, many factory houses can be closed in and roofed over very quickly, some within a day or two, and therefore locked up quickly. Thus, it’s no sitting duck for thieves and vandals, who unfortunately are now major homebuilder vultures. It’s a one-day closing-up job for a number of manufacturers. One company official has said, “The same size stick-built house requires up to ten days for the same degree of completion.” Closing up a new house fast not only cuts down on theft, but work can start inside at once no matter what the weather.

Sharply Reduced Waste
Building one house at a time, as many builders do, “. . . can lead to very expensive waste and scrap,” said T. W. Cahow, a past president of the National Association of Home Manufacturers (NAHM). He said that leftover wood, nails and broken cartons of materials like flooring and roofing, “are often carted off as scrap, adding nothing to house value, but certainly adding to the cost.” In addition, lumber and other building materials stored outdoors can deteriorate, if not spoil like food, through exposure to the weather. Waste can be kept to a minimum with a factory house because each step of the construction has been planned in advance. The lumber and other materials are supplied in the measured quantities needed.

Most Factory Houses Conform with Federal Housing Administration (FHA) Standards For ouses
That’s in addition to conforming with state and regional building codes. It’s another step forward because it makes houses eligible for government-insured mortgages, such as the FHA, Department of Veterans Affairs (VA) programs and Farmers Home Loans. It’s also a significant plus because meeting FHA standards can also mean easy approval of a private mortgage loan from a private bank or other lender. Many private lenders use FHA construction standards as a basis for approval of the mortgage. Those are 11 benefits of factory houses-one more than promised. But be realistic. There can also be bad apples among home manufacturers and lemons among the tens of thousands of new factory houses turned out every month; it’s inevitable. But the number of bad eggs is far fewer than those encountered among stick-built houses because the nature of factory production sharply reduces the chances for mistakes. Wise shopping and careful looking before buying will help you avoid these problems.

DRAWBACKS AND LIMITATIONS
Deep as one may probe, it’s hard to find drawbacks with manufactured houses from good manufacturers. In fact, most are actually very well made. Not all, however, may be blue ribbon winners in the good looks department. The worst of all, unfortunately, are some mobile homes that have not progressed much since the Model T days of the breed. Taste, of course, is a personal thing. And there is a wide choice across the spectrum in factory house styles. The floor plans and room layouts of some manufacturers may offer less variety than stick-built houses. This is an occupational hazard in the business because the nature of mass production favors standardization. Nonetheless, manufacturers are beginning to break through such limitations and develop more varied floor plans. Factory houses are still not sold everywhere, which frustrates many potential buyers. Factory houses are still barred in certain cities and towns by arbitrary building codes and other restrictive rules, many of which were written by entrenched local unions, contractors and building supply power interests. They can’t compete with factory houses, so they wage war against them. One place notorious for barring factory houses is New York City, which is cursed by a building code that is a relic of the dark ages. That’s one reason why local taxpayers pay dearly for their housing.