Investing in Modular Homes

by : Steve Gillman

If you are in the right areas, there are big profits to be made with modular homes. The downside? You may need a lot of cash for these deals.

Modular homes are not just a step up from mobile homes. The new ones are usually built to higher standards than many regular stick-built houses. They have six-inch walls and lots of insulation. Once they are on a foundation, they often qualify for regular home financing, as opposed to mobiles, which you'll always pay a higher interest rate on.

However, they are cheaper than a regular wood-framed home. This makes them a good choice for many home buyers, but what about investors? It depends how you use them. If they are already attached to a lot, you can just treat them like any residential property - as long as they are truly modular homes, and not classified as double-wide mobile homes. The latter are harder to finance, and you'll pay higher interest.

Perhaps the most profitable strategy, though, is to start with land and put a modular on it. In many areas, a modular home on an acre of land might sell for $140,000, and yet the cost of the land and the necessary improvements plus the modular may be under $100,000. There is a great opportunity in those areas where this is true.

Modular Home Investing - An Example

Suppose you have been watching sales of homes around the edge of the city where you live. Every now and then you see a modular sell, usually on an acre or two of land, because many subdivisions won't allow them. They seem to be consistently selling for around $135,000 or so if they have at least three bedrooms and two baths.

There are several suitable pieces of property in the area selling for $29,000 to $35,000. You can buy a 3-bedroom, 2-bath modular new for $64,000. The modular salesman tells you what you need to do to prepare a lot. Now you need to investigate the other costs.

The well drilling company that has been most active in the area says the wells are shallow in the area where two of the properties are. They can put in a well and pump for $3,800. The soils is sandy, so you can get a septic system installed for just $4,700. A power pole will cost $1,500, an asphalt driveway $2,800, and the foundation $3,200. Setting up the home and making the hook-ups is included in the purchase price. Closing costs and two months of holding costs will run about $3,000.

You decide that you are interested in the most expensive lot, the one that is $35,000. It has the nicest location, and it is in the area where it is cheaper to have a well put it.

Adding up all the costs, you arrive at a figure of $118,000. You think you can get more for the property, but you make a safe projection of $132,000. You realize that after $8,000 in commission and other closing costs, you would be left with a profit of only $6,000. That is not very motivating.

However, you have other plans. You have enough cash to start the project, and a home equity line of credit to finish it without getting a a new mortgage. You make an offer on the property of $32,000 which is accepted. Then you arrange for the well, septic system, and power pole to be installed. While this is going on, you start shopping for a repossessed modular.

You've seen them advertised in the paper for as little as $30,000. You let some dealers know you are interested in a "repo," and a month later you get a call. A dealer has an almost new 3-bedroom, 2-bath modular that he will sell for $49,000. You agree.

You are spending $15,000 less on the home as originally projected, and you bought the lot for $3,000 less as well. You do $2,000 in landscaping that you didn't include in your original figures. You have an extra $1,000 in holding costs because it took longer than originally projected to complete the project, and the other costs are $2,000 higher than anticipated.

The good news is that because you did the landscaping and paid for the better lot, the home sells for $138,000. Your total costs were just $113,000. Your total profit is $25,000. That is enough to make investing in modular homes interesting.