Is a Lack of Financing for Homes Destroying the Land Lease Communities?

by Kenneth Rishel

There is some discussion underway that land lease communities may have a fatal disease much like cancer. Like cancer, it is hard to pinpoint, hard to accept, and hard to treat. If it is true, however, those of us concerned with the health of land lease communities need to be aware and proactive in curing the problem.

As a note of caution, there are no formal or scientific case studies being utilized in these discussions so, they have, for the most part, been fueled by the knowledge and thinking of the participants. The participants have been a somewhat changing cast, but are primarily industry people who have a great deal of knowledge and experience, and a broad overview of the business of owning and operating land lease communities.

In the discussions taking place, there has been a diagnostic effort underway to try to understand why many communities are sick. There have been discussions about how the race to buy communities raised the prices being paid for "investment grade communities" too high and the resultant lot rents skyrocketed to "feed the tiger." This, by itself, is an important issue, and in some ways akin to an individual overeating. Following the cancer analogy, it fits within the larger discussion, because medicine has learned that overweight people are more susceptible to cancer than thin or muscular people. There is no doubt that, in people, losing weight helps, so it may follow that part of the process means prices paid for communities, and the resultant rents, need to be at numbers that keep the communities lean and muscular.

Complicating the diagnostic issue is the fact that some communities with higher rents are healthy despite higher levels of rents. In humans, there are some who smoke and never get lung cancer. This complicated the medical diagnostics for years, and caused millions of people to continue to smoke until the X factor of genetics was discovered and factored in. The truth was, there were people who smoked and would never get lung cancer because of the genes being passed down by their family lines. Therefore, it would seem apparent there must be an X factor that protects some communities, and in order to understand the problem, that X factor must be found.

In these discussions, an interesting fact that seems to clearly identify the X factor that protects some communities with higher rents from succumbing to the same illnesses that have many communities suffering, or dying, from higher rents has surfaced. There appears to be a difference based on the quality of the homes and the amenities offered by the community. The higher the quality of the homes, and the reasons to live in a community, the better the financial resources of the residents. This leads to more access to financing, and more ability and interest in buying a home in, and living in these "high rent" communities. This type of resident does not fit the scope of the typical resident who chooses to live in a manufactured home in a manufactured home community just because they have few other options available to them. Like smokers who have the right genes, these communities have the right residents.

If this is so, then part of the cure must be in attracting residents that are not the "typical" resident. To do that, a community owner must take steps that will attract residents who make an unburdened choice to live in the community. That requires thinking about marketing the community as a destination, just as those over-55 communities have been doing, even in all-age communities.

The first step is to figure out what amenities can be created in an all-age community that will make sense, but are not cost prohibitive. New homes in keeping with the price point should be the first consideration. That introduces the first concern about financing.

Do the prospective borrowers have financing available at sufficient amortization length to allow them to afford a new home? If they don’t, it is critical they offer the right medicine in the form of broad-spectrum finance that is effective in curing the problem.

Once that problem is solved, the prospective residents need additional reasons to live in this community. Just as different weight people need different doses, each community needs different amenities. Expensive outdoor pools may not make sense in an all-age community in Minnesota, but an inexpensive fitness center that consists of a few treadmills and stationary bikes might. An expensive clubhouse may not make sense, but what about allowing a local dry cleaner to offer cleaning drop off and pick up at the office for busy two-income families?

Another reason why communities have trouble selling homes is the depreciating value of the homes. Almost everyone in the manufactured housing industry accepts as fact that manufactured homes must depreciate, so what can be done about the problem? Just as medical researchers track causes, so to must the industry track causes, and the discussion groups seem to have done just that.

Outside lenders have long priced interest as if manufactured homes were cars rather than homes. New homes have gotten better interest rates and terms than existing homes. Perhaps this practice was a result of greater competition for business that came from new home dealers, who pressured the lenders for better rates. That certainly seems likely, given the practices in every cycle where lenders had money to lend and had to compete to do so. The fact that manufacturers were constantly improving the product – often leaving a distain for the older homes as less desirable – may have also contributed to the disparity in interest rates.

Regardless of the reason, the fact is, a disparity does exist, even in federal lending programs that do not exist for site built housing. This major difference has been a very hot topic of discussion among the group, and the consensus is that this is a major factor in the depreciation of manufactured homes.

Another finance-related factor is the even greater lack of financing for pre-owned homes than there is for new homes. When a dealer or community sells a home, they expend greater resources trying to provide financing, but when a homeowner sells a home, they often have few resources when it comes to making sure their buyers have financing available. They normally lack the assistance of a real estate agent, and often get little assistance from the community that is busy selling homes owned by the community.

The almost incredible thought that this industry could end the downward cycle of devaluation by taking a proactive role in making sure that all manufactured homes in a community have financing available almost seems too simple. However, the evidence has been right in front of the industry for years. In one of the early communities this author developed, a captive finance company existed that aggressively sought out all finance opportunities in the community. New homes were sold for around $35,000, which was a very high price at the time. Despite what some considered overpricing, those same homes were selling for around $150,000 years later because the homes still had financing available, and because the subsequent community owners had kept the community a destination in the minds of the residents.

All over the country, there are examples of destination communities with good financing available where HUD Code homes do not depreciate. Interestingly, the state and national associations often never acknowledge these communities because the owners are often not overly involved in the associations, and other operators who might benefit from holding these operations up as examples are never very aware of what is happening in these communities.

Like cancer, the problems in the land lease communities fester best when people don’t understand the problem and lack the willingness to tackle it. It has been easier to ignore the problem because acknowledging it would require fundamental changes that are not easy. Outside lenders, intent only on their own profits, have charged higher rates for pre-owned homes partly because they could, and partly because they had to, as the amounts to finance became smaller through the inevitable depreciated pricing that resulted. Community owners, intent on selling the homes that belonged to them, did little to help residents who wanted to sell their own homes, viewing them as competition. Homeowner residents, once realizing they owned a depreciating home, put little money into maintenance or repairs, and looked for ways to escape what they viewed as "the trap" they had bought into.

As a result, outside lenders contend with high levels of non-performance and respond by tightening their lending criteria in the hope that will create a better performance model for them. Communities respond by failing to invest in their own properties in a way that attracts and retains residents, and the residents fail to invest in their homes, which further accelerates the entire process. 

Since many community owners are now providing financing, the thought occurred to the group that community owners now make the financing rules. The inescapable conclusion is that the whole industry would be better off if those owners provided financing for all the homes in the community regardless of who owns or sells them. If the community owners also worked to make their land lease communities a destination at the same time, depreciation would be slowed.

If the residents and homeowners began to realize their homes did hold real value, and they enjoyed living in the community, they might begin to put the money into maintaining their homes just as most site built homeowners do. They might also take some pride in their home, value it as a home, and actually pay for it as agreed. # #

Ken Rishel, Precision Capital Funding, earned the MHI 2010 Service Supplier of the Year Award, and is the publisher of the Chattel Finance Newsletter. For more information, email him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call 217-971-3968.