When I tell people that I have been unusually busy lately because I bought a mobile home, the most common response is, “Don’t you know that mobile homes depreciate?” Well, yes. Everybody knows that. That is exactly why I started looking that direction for financial opportunities. What? You are thinking. Why on earth would I decide to spend my time, energy, and money on what everyone knows are depreciating assets?
In general, when everybody says that something is a bad idea or a bad investment, I think extra hard about doing it, or investing in it. Because if everyone collectively writes something off as a bad idea, even without researching it, there is probably an opportunity to be had there, and the competition will likely be thin.
One of those opportunities is mobile homes.
I started researching mobile homes this summer, not knowing anything about buying or selling them – I was just curious about the market. Then, one day, while listening to one of my favorite podcasts, Radical Personal Finance, the host, Joshua Sheats, interviewed a man from Florida who made his living buying and selling mobile homes. The business model made sense to me. Buy homes for cash from buyers who want to get out quick and need the money. Sell them with a down payment and monthly payments to someone who wants an affordable place to live, but doesn’t have the cash to buy it outright.
A couple of weeks after listening to the podcast, someone posted on a financial forum that I frequent, looking for advice on selling his mom’s mobile home. I responded by explaining what I would do if I was selling it. (Finance it myself by accepting a down payment and monthly payments, in order to maximize total return on the home.) He said that sounded like way too much work, and that they just wanted to get rid of it for cash ASAP. After a couple of messages back and forth, I found out that not only was the home in the same state as me, it was only about 15 miles away. By the end of that same week, I had paid them $17,000 cash and became the proud owner of my first mobile home.
Now for those of you wondering how much it had depreciated in the years the previous residents owned it – it hadn’t! The former owners paid $10,000 for it and sold it for a 70% gain, ten years later. By now you must be sure I am an idiot. I spent 70% more for a depreciating asset than it had been worth a decade earlier. I must be partaking in all the green crops Colorado has to offer. No, I haven’t been smoking the local cash crop, and I haven’t gone crazy. Supply and Demand, the most recognized of economic concepts, is at play, as usual. Because the local real estate and rental markets have been booming, it makes sense that any other housing options available would increase in price as well. Places to live are scarce in the Denver area, and what may not have been an ideal living situation in 2010, may look much more appealing in 2016 to many more families.
I know you are thinking I got ripped off, but whoever is buying the mobile home from me must really be getting screwed! I, and all the people who are clamoring to buy my $35,000 mobile home, disagree. Lets run some numbers to see why purchasing a mobile home can be a financially rational choice in today’s market.
In the area where the mobile home is located, the median home value is about $307,000 and the median rental costs almost $1,900/month. Now, lot rents in mobile home parks have also been rising in the past few years, and from what I have seen, the average monthly lot rent is currently about $600. Even with expensive lot rents, however, living in a mobile home can be a financially rational choice. To look at the numbers for the family buying my mobile home, they are paying $7,000 down and then will pay almost $400/month for the next eight years. They are also responsible for lot rent of $660/month for a total of $1,060/ month in addition to tax and insurance of about $50/month.
Compare those numbers to the median rental of $1,900 in the same area. The buyers of this mobile home will be coming out ahead within nine months, when compared to renting the median priced place, even with a 20% down payment. (7,000/(1,900-1,110)). In this example, buying a mobile home wins against renting, even if you assume the mobile home will depreciate rapidly.
Now let’s compare the mobile home to the median single family home in the same area, which sells for $307,000. When paying the standard 20% down, this is what your numbers would look like: $61,400 down, and your monthly payments would be about $1,400 including tax and insurance. In addition to paying about $300 more a month, coming up with a $61K down payment is an incredible feat for many (most?) families. For the many people who don’t have access to that kind of down payment and maybe less than prime credit, (this isn’t 2006 you know), a mobile home is much more accessible. Now, mobile homes don’t generally appreciate like single family stick-built homes do, so you could easily argue that a single family home is a better long-term purchase for many people. But for those who don’t have a massive down payment saved up, or aren’t willing to put it into a home, a mobile home doesn’t sound too bad after all.
Here are the numbers in easy-to-compare format:
| Thornton, CO
Oct, 2016 |
Buy median cost home
($307,000) |
Rent median cost rental
($1,900) |
Buy my mobile home
($35,000) |
| Down Payment | $ 61,400 | $ 1,900 deposit | $ 7,000 |
|
Monthly Payment |
$ 1,405 | $ 1,900 | $ 1,110 |
| Equity | Building equity | No equity | Some equity |
Monthly payment on the median priced home includes tax and insurance. Loan is fully paid after 30 years.
Monthly payment on my mobile home includes tax, insurance, and lot rent. Loan is fully paid after 8 years.
Now, what is going on in the used mobile home market that makes it a good investment opportunity for me? When an owner of a mobile home wants to sell, they generally want cash. Who wouldn’t? Buyers don’t generally have loads of cash, but they are willing to pay down the loan over time. With single family homes, almost all purchases are facilitated with the help of a bank or another financial institution. However, banks don’t generally want to deal with mobile homes. Because mobile homes are known to depreciate, they don’t have land that can be confiscated in the case of foreclosure, and they are lower value, therefore less profitable, it can be almost impossible to find a bank to offer financing for one. In order for sellers to make a cash sale, they generally have to sell for much less than they could have if the buyers had financing available.
Here is where the opportunity lies. I can offer the sellers a quick deal, in which they get the cash they need, and don’t need to deal with any of the headache of owner financing. Then, I can prepare the house for showings (repairs, painting, cleaning, etc). By offering the house for sale with only 20% down, I open up the market to many, many more potential buyers, in the same way banks allow the average Joe to buy a $300,000 house. If I was willing to sell the house with an even lower down payment, there would be hundreds more willing buyers, but then I would be taking too much of the risk for my liking.
To summarize why this works, I am providing liquidity in the marketplace that enables people to afford to live in a mobile home even if they haven’t saved up the cash. This is similar to what banks offer traditional home buyers, what Apple is doing when selling their $800 phones on payments over two years, how colleges are able to get teens to buy a two hundred thousand dollar diploma, etc.
Anyone want to buy a depreciating asset? I’ll give you a great deal!
This was a very interesting article on a very unique topic! Thanks
What are the laws like regarding nonpayment for the loan? Is it more of a “rental” situation or more like a contract for deed?
Do the buyers pay lot rent directly to you, or do they need to be approved through the park? If they dont pay, what’s your liability?
What is a “prime” interest rate for a owner financed mobile home?
Good questions Classical Liberal.
Non-payment for the loan would result in foreclosure, like on a contract for deed. Since it is a mobile home without land, it is similar to a motor vehicle. I have first position lien on the title.
The buyers pay lot rent directly to the community. I didn’t want to hold escrow, so the buyers pay that, as well as tax and insurance themselves. It is written in the promissory note that these must be paid and the property must be kept clear of any other liens or judgements. Hypothetically, if the buyers stopped paying lot rent, I would need to pay the lot rent until the eviction process was completed. (actually until I re-sold the property) This is one of the reasons it is necessary to get as big a down payment as possible. I want my buyers to have some equity in this game.
As far as interest rates on mobile homes go, I found 8-12% during my research, so I went with 8%.
Thanks for the reply! This is very interesting considering the somewhat ludicrous cost of real estate in many markets. It provides a good “middle ground” between renting and owning. I look forward to updates on how this works for you. Since they own the property, many of the usual landlord headaches would likely be avoided as well.
Genius. Plus you’re helping folks in two ways:
1. Freeing someone in a tough or tricky personal situation from the burden of owning the home.
2. Helping someone have an affordable place to live in this ridiculously overpriced city.