Monday, May 11, 2015

The Three Types of Modular Home Builders

Modular home builders can usually be separated into one of three distinct types. The Affordable Builder, the Custom Home Builder and the Specialty Builder.

The Affordable Builder tends to build homes that are just variations of the homes in the modular factory’s planbook. They can either be tract developers or scattered lot builders but normally build what the existing neighborhoods have traditionally built at a price point that gives them a lot of houses to build.

The Custom Home Builder likes to build whatever the customer wants. Sometimes it looks like a traditional home but is loaded with tons of special features, upgrades and things that the customer saw in someone else’s house and wants duplicated. I once had to build a master bedroom with a hidden door leading to a secret staircase that led to the library downstairs because the owner was a Sherlock Holmes fanatic.

The third is the Specialty builder. These builders are on the cutting edge of design and technology. Their customers want the latest high tech energy saving options, the most modern home design, Net Zero or maybe the customer is very security conscience and wants protection 24/7. No matter what the customer wants, these builders are up for the challenge.

I am going to take an indepth look at each type over the next few articles but today I’m going to begin with the Affordable Builder.

There was a time, long, long ago that paying more for a home than you could afford meant that you didn’t buy it.  Foreclosures were relatively few and far between and having your house foreclosed was the talk of the neighborhood.

Then came the first wave of mortgages that started to allow anyone with a pulse to own a house.  That was followed by mortgages given to homeowners that were not only unqualified to own a home, but the lenders and Realtors knew they wouldn’t be able to make their mortgage payments after the the adjustable rate went up.

Now all the rage is “Affordable Housing” and there appears to be two different thoughts as to how to define it.

One definition is that you use the median price of housing in your community as the criteria. 

That is flawed but you wouldn’t believe how many builders and  Realtors are clinging to it.
The Fed’s definition is the better one.  Take the 30% of the homeowner’s gross monthly income and calculate the mortgage plus monthly service costs and fees to determine the price of an affordable home for your community.

Affordable Housing

Here is a good example of median price versus the 30% rule:

In San Diego, the median price of a home is more than $500,000, a product of supply and demand and location.  Currently, the median income for a family of four in San Diego is $63,400. Utilizing HUD's definition, affordable housing for a family would be a home priced under $225,000.  That’s a $275,000 difference!

Is this the norm for all of the US?  Probably not.  But if you, as a modular home builder, want to sell to the Affordable Market, you have to do some research to find the affordable market in your area if that is the area of housing you want to market.

  1. Research and find the median income for your marketing area.  If you market to a large areas such as Baltimore or Chicago, there will be wide variations in median income.  Check as many as you can. The Census Bureau is a great place to start.
  2. Calculate the monthly mortgage amount for each median income.
  3. Then talk with a lender and ask what is included in the 30% to determine the total mortgage amount they will lend.
  4. Add the required down payment to the mortgage amount and you’ve got the highest price a median income homebuyer can pay for a home.
  5. Now comes the hard part.  What is raw land selling for in your area.  Undeveloped land needs the most work and you need to subtract the land and improvements from the total house/land price.  Try to find “open” developments in your area.
  6. Next, learn you costs!  Start with the profit you would like to make, after subtracting the land and improvements from the total price.
  7. What you have left is the “Cost” to complete the home.  After you subtract all the subcontracted work, set costs, foundation, freight, taxes, etc; what you have left is the amount you can pay a modular factory for the home itself. OUCH!  That’s probably a little shocking!
  8. SPOILER ALERT!!!  The house you build must appraise high enough to actually get a mortgage.  And with the cost of most modular factory houses today, you might be better off selling them a double wide “Hudular” or getting a Realtor's license and sell used homes.
  9. Once you determine the median income and it’s corresponding home price, all you have to do is add or subtract a little from the type and size of home depending on the income.
Here is where the factory needs to enter the picture.  You must talk with your sales rep and try to find at least 7 good looking (not double wide looking type) models that fit the cost you have determined.  If the factory can’t do it, ask to sit with their design people and work on coming up with a series of homes that fits your needs. I’m sure some of their other builders would like to have these homes also.

If your factory can’t or won’t help you; maybe it’s time to look for another factory.  Lord knows, they are stepping on each other’s toes to get business.

Affordable housing is not for the faint of heart.  It means you have to know your costs and stick to them.  It is also imperative that your factory is working with you to enter this market.

After you’ve determined a set of affordable home plans that work in your market, you need to get the word out by using all the social media you can find. Pinterest and Facebook have to be on the short list but try to list your home plans everywhere.

Good luck.


Doug in NY said...

This is exactly why I don't build affordable housing. After doing the math, there is not a lot of profit left over. I only build custom.

Anonymous said...

Are there any high volume low margin modular builders besides the retail dealer networks of the factories? Like Doug most builders are seeking higher margin lower volume by adding square footage in low costs areas like living, bedrooms, with open plans.