Fixer-Upper Mobile Home Investments


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.

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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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