Fixer-Upper Mobile Home Investments
By Steve Gillman
From a cash-flow perspective, mobile home investments often
top traditional real estate rentals. But there is another aspect
to this market that we will look at here: investing in fixer-upper
mobile homes. Compared with most types of single-family homes,
mobiles constitute a less efficient market, meaning you have
a higher probability of finding an unusually low price - especially
if they need a few repairs and some cleaning up.
Surprises are common, and because mobiles are sometimes difficult
to finance, selling can be tricky, but anytime investors are
scared away from something there is an opportunity for the right
investor.
Buying, fixing and selling mobile homes in parks has made
some big money for the few investors who do this. However, it
is not really a real estate topic. This discussion is about mobile
homes that come with land, whether on a lot or acreage.
Let's start with the end buyer and then work back to the investor.
The advantages of mobiles over traditional houses are clear for
young people starting out. First of all, it may be the only option
because of the lower price. Also, in addition to the lower initial
price, they get simpler, cheaper maintenance, lower monthly payments,
less property tax, less for insurance, and possibly even faster
equity build-up (I have explained this in another article, but
essentially it is because of the lower loan amount and shorter
term, which results in much more of each payment going toward
principle, and less to interest).
In many areas, a nice mobile home on a lot will cost 30% to
50% of what a simple stick-built home with similar square footage
costs. When I lived in Northern Michigan (until 2003), for example,
a two-bedroom home cost at least $110,000, while a decent two-bedroom
mobile home on land could be bought for anywhere from $35,000
to $50,000. When I later lived in southern Arizona, the difference
was more like 3.5 times as much for a stick-built house versus
a mobile home.
What this means is that first-time buyers can truly own for
less than rent when it comes to mobile homes. However, those
who have a hard time buying a more traditional home usually don't
have much cash for a down payment, and certainly not much extra
for repairs. That means that mobiles which need work go especially
cheap. This is your investing opportunity.
Consider the following hypothetical scenario: the mobiles
in a neighborhood are selling for $50,000, and you find one that
has been for sale for many months. The seller is asking $40,000,
but the thing needs work, and so it has been scaring off potential
buyers. You offer $32,000, and eventually get it for $34,000
cash (this works best if you do have cash to invest).
There isn't much that is expensive to fix or replace in a
mobile home. For the sake of this example, we'll say that it
takes $5,000 to prepare the mobile for sale, including holding
costs. Now, suppose you sell it for $50,000. You have to pay
a sale's commission and closing costs, which probably amount
to another $5,000.
That leaves a profit of only $6,000! You would be better off
spending your time on bigger homes. But there is a better way.
Making It Easy for the Buyer
As I pointed out, it can be tough for buyers to finance a
mobile home, and if they do get financing, it will usually be
at a much higher interest rate than that of traditional mortgage
loans. They also may not get more than 90% financing on a mobile,
meaning they may need $6,000 or more for a down payment and closing
costs.
You are the answer to their prayers. Let's start with the
example above. You have $39,000 into your property ($34,000 plus
$5,000 in repairs and holding costs). It should sell for $50,000.
However, you put an ad in the paper that says:
"Why rent when you can own this beautiful mobile home
on land for just $485 per month. Nice yard and room for a garden.
$57,000, and just $2,000 down payment."
You will get calls. Enough that you can choose a credit worthy
buyer from among them. And you won't have to negotiate a penny
on the price.
Look at it from their perspective. Similar mobiles might be
renting for $600 per month. You are giving them an opportunity
to stop renting and to own something for the same monthly expenditure.
Even if they pay more than the current market value, someday
they will have a lot of equity instead of nothing.
Screen prospective buyers well, of course, since you are putting
them into your investment with only a $2,000 down payment. They
can easily do more damage than that, and if they stop paying
on time, you will have to foreclose and take the property back.
Let's suppose that you are charging 10% interest on the financing
you are providing. $485 per month amortizes over about 30 years,
so you might want a balloon due in 5 years (they should be able
to get financing on their own by then. If the property has appreciated
at just 3% per year the home will be worth about $58,000.
How Much Can You Make?
How well did you do in the above scenario? You tied up almost
$40,000 of your money, but you made a $17,000 capital gain, plus
roughly $24,000 in interest in five years. In other words, you
more than doubled your money in five years.
What if you don't have the cash for this? If you could borrow
$40,000 against your own home, at 7% interest, it would cost
you about $12,000 in interest over those five years. In this
case, with no cash invested, you would have made a profit of
$29,000 - your reward for making home ownership possible for
someone.
Ways to Make More | Related Opportunities
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The key to this is that you make it easy for the buyer. Not
only do they need a small down payment, but there should be nothing
for them to do to the home when they move in. This is important.
Always have the home completely ready to live in. Remember that
your market is decent people who don't have much cash.
Mobiles have their own unique problems though, so be sure
to check for these before buying one. For example, the age of
mobiles is a big factor when it comes to getting insurance. Some
older homes may just be uninsurable. Don't buy before you know
that you (and your buyer) can obtain insurance at a reasonable
rate.
Some mobile homes built before 1976 have aluminum wiring.
This can be a fire hazard because the chemical reaction between
the aluminum and other metals cause the wiring to break down,
eventually leading to sparking inside the walls (not a good thing).
Remove the two screws on any of the electrical outlet or switch
covers, and look inside with a flashlight. If the bare ends of
the wires are silvery looking, they are probably aluminum. You
may have to rewire the home to get it insured.
Watch for stains on the ceilings. Mobiles are prone to leaks.
If it is a wet day and the stains are dry, the leaks have probably
been repaired, but if there are many dark stains, at least ask
how long the roof leaked for. Short term leaks that were quickly
repaired may not have done much, if any, damage to the supporting
beams. If the roof is seriously sagging there may be rotten wood
up there.
Watch for wavy walls and crooked door frames. If the mobile
is twisting or irregularly settling, the walls will sometimes
show it. It may also show in the door frames. Is the gap over
the doors straight in relation to the frame?
Test for spongy floors. Many older mobiles used particle-board
for floors. If the floor gets wet, it warps and rots. Step hard
here and there to test, especially in the bathroom. I have rebuilt
two bathroom floors in mobile homes. Around the toilet is the
usual place you'll find problems, because of the condensation
from the toilet running down and soaking the wood around it.
Is the toilet sitting straight or leaning?
Most problems in a mobile can be resolved, and for much less
than in a traditional house, so if there are problems, you may
want to see them as an opportunity to make a lower offer. You
could also just avoid the homes with problems, but this limits
the potential profits in mobile home investments.
First Steps
Look at the prices of mobile homes on property in your area,
and check out a few neighborhoods. Once you are educated on prices
you can start to look for a fixer-upper to buy and resell.
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