It’s both an exciting and challenging time for lenders in this current market. Generally speaking, housing volumes are still lagging, and demand outweighs supply. Lender pipelines aren’t exactly overflowing with first mortgage and refinance activity, so the lenders that are most proactive are most likely to attract qualified buyers.
The 2024 "State of Homebuying Report" by ServiceLink, the company where I lead our Default division, found that Gen Z and millennials are most likely of all the generations to purchase a home in 2024. (The report surveyed 1,519 people in late 2023 who either purchased or tried to purchase a home within the past four years.) Millennials and Gen Zers are also poised to refinance, take out home equity loans and consider auction properties in larger numbers than their Gen X and baby boomer counterparts. That said, even with their enthusiasm to get involved in the housing market and become either first-time or repeat buyers, the interest rates and number of homes available are hampering their efforts.
As of the end of 2023, the U.S. was short by 3.2 million units. While some experts say new home construction will help bridge the gap, and it certainly can help, those higher-end homes are not necessarily in these younger and/or first-time homebuyers’ price range. A Forbes article said the average cost to build a new home is around $329,000, and that’s not counting the cost of the land. Considering the typical annual salary of Gen Z workers was less than $40,000 in 2021, new construction may be out of the budget for many in this group.
An Alternate Path For Lenders To Consider
So, where can lenders turn? From my vantage point, I’m offering that manufactured homes could be both a revenue stream for lenders and also a more affordable path to homeownership for buyers. For the sake of this article, I’m using "manufactured homes" as a catch-all term for modular and mobile homes, as both are built in a warehouse and then transported to the site. Because of the controlled atmosphere, they can be manufactured more quickly than stick-built homes (those built on site) and generally have a lower price point.
Factory-built homes reportedly cost about $72 per square foot. For comparison, traditional new construction costs, on average, around $144 per square foot, according to a report by the Joint Center for Housing Studies of Harvard University.
In recent years, our team has noticed that manufactured home builders seem to be ramping up production of single-family homes. Although in years past, these homes may have had a reputation of being lesser quality, the perception amongst buyers now appears to be more positive. In fact, 62% of people in a 2022 Freddie Mac survey said they’d consider purchasing a manufactured home.
Willingness to buy is there, but financing for these homes can be difficult to obtain. Why? I believe it's because not all lenders have dipped their toes into the manufactured home lending space. It’s an area that has the potential to drive revenue, but it is a specialized process that requires additional expertise.
So, what do lenders need to know to thrive in this niche market?
1. Understand the nuances.
Manufactured homes have a different titling and conversion process that is more complex than existing or stick-built homes. Generally, the land on which the home will sit is conveyed by a deed, but the manufactured home itself is also issued a title and often classified as "personal property," similar to a boat or RV, according to the National Consumer Law Center. The home can only become "real property" once permanently affixed to the land.
During this all-important conversion process, the original title typically must be obtained from the manufacturer and surrendered properly, the NCLC also said. If this doesn’t happen correctly, it could pose additional problems for lenders down the line, particularly when it comes to foreclosures.
Appraising a manufactured home also comes with its own rulebook. For example, as explained by Fannie Mae, the appraisal must include a minimum of two manufactured home comparable sales. The appraiser may also leverage site-built housing or a different type of factory-built housing as a third comparable.
2. Partner with experts.
About 75% of the states in the U.S. have established procedures to convert a manufactured home from personal to real property, per the NCLC. The conversion process is complex because these regulations vary from state to state. For this reason, I recommend working with a title company that has a broad range of knowledge on these types of transactions.
Understanding the various regulations and processes will help to keep the conversion moving smoothly and without additional delays. Similarly, when it comes to the valuation of the home, working with an appraisal management company that has appraisers experienced in manufactured home valuation can help lenders avoid missteps in the appraisal process. (Full disclosure: My company provides appraiser services, as do others.)
3. Demonstrate your level of commitment.
One of the ways to be successful in this venture is to be that go-to source for information and support. Remember, these young, cost-conscious buyers are turning to alternative avenues of ownership due to the tight housing supply. They could be frustrated that they can’t just go to any lender for financing on their manufactured home.
So, if lenders can demonstrate their willingness to help buyers achieve their goals, particularly in this niche market, they will have a greater chance of earning their business. I always say that lenders who commit to financial literacy and education in a variety of mediums can better attract buyers. This could include sharing articles, videos, blog posts and being active on key social media channels.
Ultimately, getting into the manufactured home lending arena will need to make sense for each individual lending institution. However, with the right team firmly in place, it’s an opportunity to differentiate one lender from another, expand the portfolio and serve a new group of buyers who are looking for solid solutions in a challenging market.
Previously published on forbes.com
