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Dealer, heal thyself

Consumer-unfriendly tactics plague sales.

July 1, 2005


Ron Wirtz Editor, fedgazette
Dealer, heal thyself

Manufactured HomeDespite the fact that a manufactured home is never moved again after installation, it still shares the kindred spirit of a car. To see the similarities, one has to go no further than a dealer's lot, where homes are perched on wheeled chassis for immediate delivery, and salespeople are ready to make it happen. It's the only home on the market where you can literally kick the tires.

Many have also likened the purchase experience to that of car buying. Maybe that's not fair to either industry, but both suffer from what might be generously called unfriendly sales tactics that don't always have a buyer's best interests in mind. A January industry outlook by A.G. Edwards & Sons spoke of "the continued widespread lack of trust-worthiness throughout the manufactured housing industry." Said one South Dakota manufactured home dealer, "There's a lot of snakes in the industry."

Related articles in the fedgazette:
Focus: Housing, May 2005

Certainly some—probably most—buyers have good experiences, or there likely would be no manufactured home industry to speak of. But enough have bad experiences to hold the industry back in terms of improving its overall reputation among the potential home buyers and the general public.

Chris Stinebert, president of the Manufactured Housing Institute (MHI), noted via e-mail that consumer complaints tend to be "lodged against a handful of retailers," rather than broadly across the industry. "(I'm) not sure the situation would be different for any home builder or remodeler."

But he added, "That being said, we still have much to do to improve customer satisfaction with the home buying process."

Financing and installation

There are two main areas of buyer concern when it comes to manufactured homes: the purchase transaction and the home's installation.

On a dealer's lot, there is often not a lot of information disclosure. Claims of fraud are not uncommon (though no research could be found suggesting whether its incidence is higher than in site-built homes). The Southwest regional office of Consumers Union (a nonprofit testing and information organization and publisher of Consumer Reports) has done extensive research on the manufactured housing industry (mostly in Texas, where its office is located) and found questionable sales tactics and outright fraud. In 2002, it analyzed 400 complaints filed in Texas and, among a litany of items, found falsified loan applications, hidden costs and fees, even delivery of different models or sizes than ordered and refusal to give buyers copies of loan and other contracts.

Prices of the homes themselves are not usually firm or transparent, and often not even posted. In a recent survey of buyers, Consumers Union noted that just 26 percent of respondents said prices at Texas-based dealers were clearly posted on homes.

Still, it's not the cost of the basic home that typically gets a buyer in trouble, but the additions of various amenities—better countertops or flooring, air conditioning, you name it—that can be easily added to any home today.

"When people are out there buying, so many people are underwater from everything that gets added on," said Suzanne Henry, a policy associate with Consumers Union. (Other additions like basements and garages also hike the price considerably, but these items are often handled separately from the home purchase, sometimes by local independent contractors.)

Even comparison shopping for manufactured homes is difficult because little information is available on prices of similar models or product quality of different manufacturers or even mundane things like financing options or resale value.

Financing often comes in the form of a personal property loan (also used for car purchases), which typically receives quick approval and can encourage impulse buying and upgrading. The majority of buyers also arrange financing through the dealer (similar to a car sale), often with a third-party lender. This allows the dealer to direct the financing to an affiliated company and collect a commission based on a home's sale value, which aligns lender and manufacturer interests with the dealer, rather than the paying customer.

Given that arrangement, those who go through the effort of comparison shopping are typically rewarded, according to Consumers Union. For example, consumers who finance through a dealership—rather than with an independent, outside lender—paid almost 11 percent more for their home; first-time buyers paid 8 percent more than experienced buyers, who have more familiarity with the product.

During the 1990s boom in manufactured homes, underwriting standards were loosened and loans were often based on ability to pay rather than on traditional loan-to-value ratios used for site-built homes financed with conventional prime mortgages. This often put buyers "underwater" or "upside down" in terms of home equity—they owed more on the loan (sometimes much more) than the home was worth.

In the end, it helped unravel the industry: Delinquencies went up, and for literally hundreds of thousands of owners, it made financial sense to default on the loan and hand over the keys to their home. The alternative was to sell the home but continue to pay a lingering loan balance.

Castle installation

But that's only half the concern for buyers. Even if the purchase goes smoothly, there's still the small matter of delivery and installation of the home.

A home is inspected by a HUD-approved inspector (often a private contractor) before it leaves the factory. "That's when HUD signs off," said Henry. At that point, the lines of accountability tend to blur, but many problems can pop up. "When a unit moves, this is where the ball is dropped," said Henry. "There are so many areas where problems can happen."

According to Scott Wheeler, with the Minnesota Building Codes and Standards Division, the state receives between 65 and 90 complaints a year regarding manufactured homes, "nearly all related to the improper installation of homes."

Multiple on-site items have to be completed—like installation of a foundation (if desired) and utility connections—and different parties are often involved in the delivery and installation of a home. While buyers might think the dealer is on the hook to make sure everything goes well, that's often not the case; unless otherwise agreed to, a dealer's responsibility often ends when the purchase contract is signed.

LeRoy Stublaski, with the Wisconsin Safety and Buildings Division, an arm of the Department of Commerce, is the point person for manufactured housing complaints in that state. He said most of the complaints he sees have to do with "cosmetic issues"—cracks in drywall, trim damage, flooring errors—and accountability for fixing the problem often is a game of pass the buck.

"Buyers always have a civil (court) recourse" to have problems fixed, Stublaski said, "but quite frankly, on cosmetic issues, that is their only recourse."

Stublaski said a buyer is better off with a hands-on dealer who will get involved—and be accountable for—making sure the buyer is happy with the home after delivery and installation. When homeowners are responsible for items related to final installation—like putting in a permanent foundation—that's where trouble arises because the legal lines of accountability are obscure.

"Those are the nasty ones," Stublaski said. "If the dealer does everything, my experience is that there may not be fewer problems, but the area of responsibility (for fixing problems) is a lot clearer. ... I think dealers that are successful are the ones taking that approach."

And in fact, Minnesota's manufactured home industry is leading just such a crusade to raise the hands-on, customer-friendly profile of dealers.

The push for this change has been somewhat indirect and serendipitous, according to Mark Brunner, executive vice president and CEO of the Minnesota Manufactured Housing Association. Over the past decade or two, manufactured home sales have slowly moved toward placement on privately owned lots, rather than in manufactured home parks where lots are usually leased. (This trend stems in part from a dearth of new manufactured home parks—more on that in the article "Hello, have we met?" in this issue.)

As a result, more buyers were looking for a real estate mortgage (which they qualified for more easily because of land ownership), but dealers needed a Realtor's license to handle this type of loan transaction. And for a real estate mortgage, the home being sold had to be affixed to a permanent foundation. So many dealers in the state decided to go ahead and get licensed as a residential contractor to do that work as well, Brunner said.

"We have really led the nation in foundation (work) and real property mortgages," said Brunner. "Minnesota is light years ahead."

The data tend to support the claim and show the benefits to dealers of offering more comprehensive customer service. From the industry peak in 1998 to 2004, nationwide sales plummeted by two-thirds. In contrast, sales in Minnesota have ebbed lower a bit, but not with anything close to the velocity of the nationwide trend, or even of other district states (see chart on district placements). "The state hasn't really gone in the tank like elsewhere," Brunner said.

Brunner acknowledged that when the industry first pushed into greater licensing, "those were some growing pains. But that new model really seems to have taken hold" and is now being copied in other states. As of May, there also was a proposal in the state Legislature to require licensing for manufactured home sales professionals, which would include a criminal background check, a competency test and continuing education requirements, according to Brunner.

"The intent is to raise the bar" for people working in the industry, he said. Fannie Mae also has been pushing for increased licensing "so everyone's got some skin in the game" when it comes to customer satisfaction and liability, Brunner said. "Either do it right or you're out of business."

Underwater flotation device

The industry is also undertaking other changes to be more customer friendly.

"We strongly believe in self-policing ... (and the industry) has taken great steps to eliminate any fraud in the home buying process," said Stinebert of MHI. One effort along those lines is a "lender best practices" program that, among other things, requires participating lenders to report instances of retailer fraud to a centralized database "so lenders can avoid doing business with bad actors."

Other efforts are afoot. MHI, in cooperation with Fannie Mae, is launching an online database of original manufacturer invoices so lenders and appraisers can verify the original wholesale price of the home "and eliminate any misrepresentation of invoices," Stinebert said. The industry is also implementing a voluntary truth-in-invoicing program in which manufacturers disclose any retailer incentives on their invoice so that lenders and appraisers do not finance such incentives and are able to accurately value the actual contents of a home. Along with higher down payments and lower loan-to-value ratios, the industry is pushing for better appraisals on both chattel loans and conforming mortgages, all of which is intended to reduce the number of underwater buyers.

Still, not everyone is convinced of the industry's benevolence. For example, there are few government-mandated safeguards protecting buyers of manufactured homes, particularly for those buyers who finance with personal property loans.

In their place are industry-encouraged practices, which means that scofflaws can and do operate under the radar.

"I don't see a big movement in the industry for specific consumer protection laws," said Henry, from Consumers Union. The organization has recommended the industry institute sticker pricing, just as the auto industry eventually adopted after long resistance. "The auto industry thought it was a way to overcome the valuation problem and (eliminate) bad players," Henry said.

Maybe one more way the manufactured home will act like a car.

Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.