A HUD Code Home Apartment Alternative?

by Edward "Eddie" Hicks

As the Chattel Mortgage industry thins, the demand for manufactured homes slims with it. Although there are new lending programs creeping into the market place for manufactured home purchasing, most are targeted at the better credit quality borrower, which is decreasing the numbers of potential manufactured home buyers.

There is a very promising concept that may require manufacturers to modify home designs somewhat, may keep the assembly lines rolling.  

A few community developers are now looking at FHA insured financing, but not necessarily at the programs specifically designed to finance land-lease communities such as the FHA 207m program. Alternatively, they are looking at a program designed to finance multifamily properties: specifically the FHA 221(d)4 loan guarantee program.  

The concept is this:  rather than build an amenity center with home sites for lease, they are building the amenity center, the pad sites and purchasing the homes, which are placed on permanent foundations.  Although both single-section and multi-section homes are being used, in some cases, they are seeking the use of duplex designed models to be placed on the lots, instead of individual homes. The duplex design is particularly attractive when land cost is excessive. The home and land are then leased together, creating a multifamily project. If the property is zoned for manufactured housing, HUD code units may be used.  If otherwise zoned for multi family or if duplex units are to be used, the factory built homes must comply with the areas Modular housing building codes.  

The loan FHA 221(d)4 has a fixed interest rate with a forty (40) year fully amortizing term.  The forty-year term does not include the construction timeframe.  The loan is non-recourse, including the construction phase, and the interest rate for the permanent portion of the loan is fixed prior to the initial closing.  The maximum loan amount is determined by the lesser of: 83% of the project cost, a debt service coverage of 1.2%, or the statutory limits as modified by the area's High Cost Factor, which is updated yearly by HUD.   Interest rates are tied to the ten year t-bill rate at the initial closing of the construction part of the loan, and with a 0.5% cost of MIP which is added to the rate when the loan transitions to a 40 year permanent loan, remains constant throughout the loan term.   In some areas, this may be an ideal solution to creating low cost, senior housing alternatives.

There are numerous benefits to this concept.  The tenants are able to live in a more personal, single family detached environment without shared floors, ceilings or walls, except of course, in the lower-cost duplex model.  Even in the duplex models, the common walls are limited to a few areas, and are not overhead.  Tenants are able to have their own private yard and are able to park close to their unit, a feature garden style apartments generally do not offer.  They are able to enjoy a larger rental space with a more community feel.  In many cases, they can take advantage of lower rents than are generally available in local apartment complexes.  Another benefit, which proves crucial, especially in rural markets, is the overall construction cost of the project when using manufactured housing in lieu of stick built construction.

By decreasing the cost of construction, this type of development is a better fit for rural projects.  A problem has always been that the cost of construction in rural areas could not be justified by the rents achievable for the area.  There was just not enough return available for the sponsors/investors in such deals.  

On the flip side of the benefit to rural developments, projects that are able to receive the proper manufactured housing zoning that are closer to major metropolitan areas create meaningful affordable housing alternatives.  Depending on the market area, a typical entry-level single-family housing cost of approximately $175,000, which equates to a $940.00/mo payment (using a 5.5 0% interest rate on a 30 year loan) after making a 5%, or $8,750.00 down payment, not including settlement costs.

Typical apartment rents in those markets are approximately $997.00 for a two bedroom, two-bath unit and $1,350.00 for a three bedroom, two-bath, with adjustments made for utilities.  Through the construction cost savings, a developer using manufactured housing would be able charge rents of $750.00-$850.00 per unit providing a much larger living space, as a single family detached living space, no common walls (except for the duplex design), with a private outside patio area, and parking adjacent to the unit.

Using this method of constructing multifamily projects provides great potential for both rural and metropolitan areas.  It provides affordable housing alternatives and assists with cost sensitive projects that are badly needed in many rural communities.  Developers can take advantage of long term financing with the security of a locked interest rate on their permanent loan, months before they begin making payments on their debt.  Developers are also able to do multiple projects without tying up credit lines due to the non-recourse provisions of the loan.  Aggressive home manufacturers have a new avenue for sales to the developers of these projects, and who knows, they may even win some awards for new housing designs to fit this innovative movement.  # #

Edward 'Eddie' Hicks is a licensed RE Broker and Mortgage Broker in the Tampa, FL area. He has over 45 years experience as a manufactured housing retailer, manufacturer and developer.  In recent years, he has assisted investors in acquiring or developing investment grade manufactured housing land lease communities. He is a specialist in the FHA 207m loan program for private lender financing of qualifying communities with HUD loan guarantees.  Contact him at (813) 661-5901, www.mobilehomepark.com, www.factorybuilthome.com or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  For more information about the loans addressed in this article: www.fha207m.com.