Buying a manufactured home is a great option for anyone wanting their own home at an affordable price. The average cost of a manufactured home is just under $100,000 nationally, compared to just under $300 for the average site-constructed new home. Yet manufactured homes today are sophisticated enough that they are often indistinguishable from custom homes built on site. The features of a manufactured home are now nearly indistinguishable from those in a site-built home.
As with any product you buy, the mass production used for manufactured homes often means a dramatically lower price, since they are created in the controlled environment of a factory where labor can proceed effectively and quickly when compared to the traditional method of building a home on-site, stick-by-stick. Because they are built indoors on an assembly line, quality control is easy to maintain, and there are never any delays due to weather.
While most buyers of manufactured homes focus on the house style, materials, and features, it is equally important to pick the right builder, as well as the right dealership for your manufactured home. As you begin shopping, there are several important things to know about builders of manufactured homes and the dealerships that sell them.
Fewer Builders Than You Think
Currently, there are approximately 70 builder-brands of manufactured homes in the U.S, offering more than 300 different individual home models. But this is somewhat deceptive, giving a false impression of the diversity that is actually available. As is true in most manufacturing sectors, manufactured housing has become consolidated in recent years as parent companies have gradually acquired independent builders and small corporations have merged. Mergers and acquisitions are a regular occurrence in the manufactured home industry.
The largest manufactured home companies in America generally own many different builders. At last count, three companies own more than 70 percent of all manufactured home builders in this country. Companies that appear to be competitors very often prove to be sister organizations under the same parent corporation. The largest parent company, Clayton, makes 41 percent of the manufactured homes made in the U.S., under several different builder brands. While these individual builders may offer some unique attributes even though they are owned by the same parent, don't be surprised to find that many builders are sourcing exactly the same components from exactly the same wholesalers. This can lead to a disappointing lack of diversity for consumers expecting an experience comparable to the standard home construction industry.
When selecting a builder, make sure to include builders who are owned by different parent companies, as this is where the most interesting differences will be found.
After you have chosen the builder, you'll need to pick a manufactured home dealer that carries homes made by your selected builder, and this decision is just as important as the builder itself. A single builder may be represented by a single factory-direct dealer, an independent dealer, or a mega-dealership that handles many builders of manufactured homes.
The Role of the Dealership
By law, builders of manufactured homes cannot sell directly to the public, so the industry business model offers builders one of three options: contract with an independent dealership to sell their homes, contract with a mega-dealership, or establish their own affiliated "factory-direct" dealership. A potential home buyer needs to understand the differences. All dealerships must be licensed and bonded to sell manufactured homes.
When buying through a dealership, keep in mind that every business has to make a profit. Manufactured home dealers make their profit in several ways, with an average profit of 18 to 26 percent. This makes the manufactured home business more profitable for dealers than standard homes are for real estate agencies, though to be fair, dealers have inventory considerations that is not present in standard real estate.
The most notable methods of profit for manufactured home dealers are retail markup, holdbacks, and referrals.
- Retail markup for the manufactured home industry works exactly as it does for any other sector of retail sales. In this case, the dealer sets a markup price that is 7 to 10 percent over the actual cost paid to the manufactured home builder.
- Manufactured homes have a built-in profit for the dealer called the holdback. Structured in much the same way as in the automobile industry, the holdback is a set percentage over builder cost that is already built into the invoice price of the home. Even if you purchase a home for a price exactly equal to the invoice, the dealer is still profiting because of this holdback, although they don't receive it until the end of the year. If a dealer claims to be losing money by selling a home near invoice price, don't believe it: There is still holdback profit being enjoyed by the dealer.
- Some dealerships offer insurance, extended warranties, or other features as add-ons to the price of the home, and they are making a notable profit by this form of referral. The actual companies servicing the insurance or warranties are essentially paying the dealership a referral fee for selling their products to the home buyers. It therefore is a good idea to decline such offers, since you will almost always get a better deal by arranging for your own insurance.
An independently owned dealer is usually a small, locally owned business that offers a limited selection of homes. The display lot for an independent dealer is typically fairly basic, with a relatively small number of display homes, although other unseen models may be available for sale. Homes are obviously set up temporarily, without furniture and décor. Independent dealerships have lower overhead costs, which helps them offer lower prices. Despite the bargain-basement appearance of these dealerships, it is usually where you will get the best deals on exactly the same homes offered by more sophisticated dealerships. When working with an independent dealership, customers often arrange for financing through their own bank or credit union.
A factory-direct dealer is usually owned by the same parent company that owns the builder, but they are completely different entities, each of which aims to be profitable.
Factory-direct dealers are often thought to have the lowest prices—and the dealership encourages this misconception. But in reality, it's usually the exact opposite. The dealership still buys the home from the builder and both need to make a profit. Factory-direct dealers aren't the cheapest option for most, but they aren't the most expensive option either.
Mega-dealers that carry different makes and models of homes from several builders are becoming increasingly popular. These dealerships are usually very nice establishments with homes set up and staged perfectly, including skirting and decking, furniture, and interior décor. This marketing strategy is meant to entice consumers on an emotional level, allowing them to envision actually living in the space.
These mega dealerships are often the highest-priced option for consumers. They often use a form of middleman financing, known as floor-plan financing (see below) to get their display models. For this reason, their overhead costs are high, and it is the customers who ultimately pay through costs added to the price of the home.
How the Dealership Finances Its Inventory
Dealers must have display homes on site for the consumers to inspect, and in the case of mega dealerships, this can be a sizable number of homes. A dealer can buy these display homes directly from the factory if they have the capital. If not, they may use a form of borrowing known as floor plan financing. In this financing model, the dealership is basically borrowing against the value of the inventory, paying interest each month to the builder with the inventory used as collateral. This is a form of revolving credit, in which dealers maintain a sizable amount of debt that is used to keep display homes present. This financing model is also common for dealers who handle cars, boats, RVs and other vehicles, where a large amount of inventory must be on hand. (Floor-plan financing is why there are often such good car bargains offered at end-of-year closeout; the dealer can no longer afford to pay the interest costs for inventory they have purchased on credit.)
The manufactured home dealership often uses a form of floor-plan financing to buy its model homes on credit. But be aware that home buyers ultimately are the ones paying the financing charges for the dealership who has purchased homes from the builders in this way. The more model homes a dealership stocks, the more likely it is that the dealer's financing costs will be included in the price you pay.