21st Century / Clayton Homes Cash Program - Webinar Recap

I just listened to the 1.5 hour webinar that Frank did with Lance Hull from 21st Century. I took notes as I listened and I thought I’d offer them for others who were interested in learning more about the program. I’ve got a lot of help from these forums so hopefully this is one way I can contribute back. My notes might not be perfect so please let me know if anyone notices any errors. And it’s probably best to hear it directly but this can be a good reference to refer to. Link to Webinar is below.

Currently I’m doing my research on parks and plan on purchasing in 2016 (waiting for liquidity). I purchased an SFR in 2014. I haven’t attended a bootcamp yet, but I’m working with other investors who have attended the bootcamp and who’ve purchased many parks. I’m helping to run analysis on deals, helping with due diligence, etc. Anything to learn and gain experience.

If anyone sees an error in the notes, let me know! And the link to the webinar:

FRANK TALKING

  • Chattel lending collapsed in 2000
  • Bad things about vacant lots
  • No income
  • Look unwanted & abandoned
  • Bank financing harder if occupancy is below 80% (might have heard this wrong)
  • More vacant land to mow
  • Kids love to build skateboard ramps and cause problems
  • Vacant Lots become dumping zones for trash and debris

Up til now - options to fill land

  1. Bring in an old junker - Cost about $15,000
    $5,000 for home / $5,000 to move / $5,000 to set it - And it’s not attractive to new tenants

  2. Bring in Repo homes - Cost about $25,000
    $10-15,000 for home / $5,000 to fix / $5,000 to move - And you still have a 15 year old home

  3. Bring in a new home - Cost about $35,000
    $30,000 for home / $5,000 to move it
    Nice home but lots of cash out of pocket

LANCE HULL STARTS

In 2000, Chattel Market crashed
Warren Buffet, white knight, bought Clayton in 2003. Brought stability to the industry

A little history
Clayton’s Financing originally came from asset-back securities market
Clayton started with retailing then manufacturing, then financing
Created Vanderbilt Financing

2003 - Buffett bought the company and its subsidiary Vanderbilt.
Now Vanderbilt had access to funds

Tim Williams in 1995 - President of Vanderbilt - he started 21 Century
Began as a joint venture with Clayton.
25 Chattel Lenders at the time.
Only 2 left.

Buffett now owns Clayton, Vanderbilt and 21 Century
21 Century - does about $1 bn in loans

Above history might not be as important but since I took notes, I thought I’d include them. ^^

For MHPs - Two biggest problems with vacant lots:

  1. Expensive to bring on a home
  2. Even if you have a capital, there’s no affordable consumer financing for your end buyer
  3. Rates are too high or down payment is too high

What the industry needs:

  • Affordable source of capital for MHPs
  • and homes that are affordable for the consumer

Can’t do this program in -

  • NJ
  • Connecticut
  • Rhode Island
  • Massachusetts
  • Alaska - hard for manufacturers to reach but they do loans in Alaska

21st Century Works with: 36 manufacturing facilities (clayton), including other brands

  • Schult Homes
  • Karsten Homes
  • Golden West Homes
  • Cavalier Homes
  • Crest Homes
  • Marlette Homes
  • SEhomes
  • Norris Homes
  • Giles Homes
  • Buccaneer Homes

http://www.claytonhomes.com/clayton-brands.cfm

Clayton does:
30,000 floors (45% of all manufactured product in the country)
In general, to get a sense for that producting: 2 floors for multisection / 1 floor for a single section

How the Program Works
Step 1:

  • Home is paid for and delivered to your MHP
  • Set and installation you pay but 21st reimburses
  • Up to 12 mos to sell - no interest accrued / no holding cost during that time
  • You have 12 mos to sell it.

Step 2:

  • Avg credit score = 585 (Typically doesn’t perform well) for the program
  • Usually consumer pays high down payments / high interest rates
    BUT:
    With the CASH PROGRAM
  • Downpayment is never over 10% (if credit score is 600 or better could be 5%) & rate is never over 4.5% - on a 10 year term (at current interest rates)
    This = about $260 / month + Lot rent

BUT: MHP operator buys down the 9% rate (which would be typical based on the credit score) to 4.5%
MHP buys down at 18% of the loan amount. (see scenario at the bottom)
MHP operator can finance the buy down through 21st century (so don’t need to pay 18% all at once
MHP Operator would pay down 18% over 60 mos at 9% Interest

Who Can Qualify for this Program:

  • This is not for hardscrabble park with dirt roads
  • 21st wants to work with parks that have at least 10 vacancies to fill

Key to this: Must be Win Win
If tenant doesn’t stick, then MHP is gonna lose tenant and house will get repossessed.

21Century Analysis from looking over 100,000s of loans:

  • Equity in the deal is important; leads to performance by the customer
  • 20-30-40% Down leads to performance on loan but customer can’t afford to pay that upfront
  • So 21st century want customer want to build equity quickly in the home
  • Shorter term product - 10 years. Almost everything they pay is going toward paying down the loan. After 5 years, pay down is almost 50%.
  • So tenant doesn’t want to walk away and leave MHP Operator with a house that will get repossessed and leave you with an empty lot

Results so far of this Program: In 3 years - 1,300 Loans

  • Started - May 2012 (about 400/ year - my calculation. Don’t know if this number has been growing or an average.)
  • 13 defaults out of 1,300 (1% Default rate)

Reasons for Chattel Loan Collapse in 2000

  • 0% loan
  • No income documentation
  • Length of obligation - Greentree brought out a 30 year loan product

How to Get Started with the Program

Criteria

  • Location can be reached by manufacturer
  • 21st’s problem = available resources
  • Therefore, need to find best opportunities
  • If less than 10 vacant sites - not worth your time or their time
  • Licensed Retailer - cannot purchase homes without a retailer license. Must be willing to be licensed
  • MHPs need: Positive cashflow / Certain amount of liquidity and with principals (recourse loans - 90% of the time there are personal guarantee)
  • 3 or 4 pages application - Company & Personal financials, Tax records, etc, and request to release Park Operator credit information.

What if MHP Operator can’t find a customer in 12 months?

  • To avoid this, start with the end in mind: What can the customer afford? Site rent / mortgage / taxes / Insurance
  • Need to stay within this amount - must bring in homes that your customer can afford - http://cmhcommunitycalculator.com/ (use this to calculate how much the customer can afford)
  • Average home in this program sells in about 4 mos.

If it doesn’t sell the “spec home” as they are referred to:
If you want to rent it out - you pay back the set up fee - that’s your down payment) and you finance the rest through 21st Century.

So one scenario might be - start with about 3 unsold homes. Then if the homes sell quickly,bring in more.

What’s the best state for deals approved?

  • 80% approval on applications
  • Michigan, NY, CA, Texas, Illinois have been more active states

How long will program be offered?
Not specified - don’t anticipate slowing down
Wanted to grow 40% this year
Then 40% the following year

How to get a Retailer’s (dealer’s) License?
Generally (varies state-to-state)

  • Filling out a form
  • Attending a seminar
  • Taking a test
  • Sending money to the state (fee)
  • Might need a bond
  • Might need continuous education

Do you need to be SAFE Act Licensed?

  • 21st century is the licensed originator
  • 21st century takes the responsibility of making compliant loans
  • 2 Community sales reps (are licensed originators)
  • 21st Century wants to deal with the customers directly

What are True Homes vs regular Clayton Homes?

  • True homes can be used - about $2,500 cheaper
  • 14 Wide / Single Section homes
    (I might be off on the above)

What happens if there’s a customer default?

  • 21st century will service the loan and make sure it’s compliant
  • If 21st has to repossess home - then community owner should buy it.
  • Only has happened 13x’s
  • Because of equity structure - Homes have good equity quickly
  • Even if home is repossessed - reasonable paydown loan. Operator only owes the payoff loan. Operator can resell it. New customer can have the same financing structure. Of the 13 homes - none of them stayed vacant for more than 90 days.

How much does park owner have to come out of pocket on repossession?

Scenario:

  • Default on a $30 K loan after 2 years
  • Approximate Balance - $24,000
  • Operator can just make the payment on the loan until they find a new customer that will finance the loan. (about $240 / $250 a month)

If the 18% Down Payment is financed by 21century (interest rate buy down price) - What’s the Interest Rate? Is it Variable?
All loan products are fixed rate now.

Example of $30,000 loan

  1. Customer payment - 4.5% Rate (120 months) = $310 / mo
  2. MHP Operator contribution - 18% of the Loan 3. Amount - $5,400 to buy rate down from 9%
  • Can pay $5,400 upfront
    OR
  • Finance that amount of $5,400 to the operator at 9% (60mos loan) - about $112 / mo for 5 years (Will end up paying $6,720)
  • Net $188 (on $300 / site rent)

Do you have homes for RV Parks - limited by region
These areas have a manufacturer: Buckhire, AZ / West Coast / Texas

What are the Price Range of Homes in this program?
True 14/56 - $18,000 (low end)
True 14/66 - $20,000 (low end)

Marlet - $70-80K

Avg: about $28,500

Customer Payment for different loan amounts
20K - $207
30K - $310
40K - $414

Contact info:
lancehull@21stmortgage.com
800-955-0021 ext 1218

Casey Bidleschies (will help underwrite the loan) - I probably misspelled that

What’s the Time Frame for Delivery and Set Up?

  • 10-12 of 36 Clayton Facilities currently seeing the bulk of the orders
  • 2-3 Weeks Backlog
    *7 Weeks Backlog for some facilities
  • True MHs - 12 Week Backlog

Now doing an Inventory Planning Session
*Gearing up for Spring Tax Selling Season

  • And after kids go back to school selling season
  • Will start planning out what’s needed for next season
  • 21st is okay holding homes to make them ready for shipping to the MHPs

What’s included in delivery and setup?

  • All the appliances - range, fridge, dishwasher, washer /dryer, air handler, air conditioning - will be reimbursed for (set up cost), Footers / skirting, etc (will be reimbursed)
  • Will not pay for site trap or underground piping (in other words, won’t pay for cap ex expenses to improve the park)

How long do you have to own a park to be a part of the program?

  • No time limit for indv communities
  • Will ask questions such as - How much time have you been in the industry? Are you established? How long has your entity been established?

What happens if you need to sell your park and you’re part of the program?

  • Any outstanding obligations - are all commercial loans to operators
  • New buyers need to take on obligations
  • Or seller has to pay in full for the obligations
  • There are provisions for transfer for ownership in the contracts

Is this program available for lots on subdivision?
No. Only Chattel loans for parks.

Can you use this program for a new community?
Yes… for placing homes, yes.

Minimum number of homes for community rental program?
At least 10 vacant sites

Do you need a dealer’s license for community rental program?
CASH program - is what’s been discussed
Community Rental Program - is very similar to the CASH. Only it’s for Rental Assets.
You can partner with a dealer, if you don’t have your dealer’s license
In TX, Mississippi: 21st Century can be the dealer

Who pays insurance when it’s sitting?

  • Invoice is to the community operator
  • Covered by open lot policy
    (I wasn’t sure about this part above)

Is seller required to be loan originator?
No. 21st is. Seller is licensed retailer

Can 10 homes be on different parks?
Yes. but better to have all purchases under one retailer license.

Warranties / Guarantees for the homes?
Full 1 year manufactured warranty from time of occupancy / 30 Day Cosmetic warranty

Do you run credit checks on the Park Owner? What’s minimum credit score?
Yes. It’s all part of the commercial credit evaluation. If credit score is low, will look for things that offset such as high liquidity.

Can Park Owners use realtors to sell their home?
One realtor working in FL on this.
Want to keep the house as affordable as possible
Is the realtor willing to work on a 5% fee structure?

Scenario:
House is $30K (already paid by 21st)
Set up is $7K (Park Operator pays / reimbursed to the Park Operator)
$37K - total cost to the buyer

  • Tenant needs to put down $3,700
  • Park Operator needs to buy down interest at:
  • $37K @18% = $6,600 (either paid upfront or financed at 9% over 60 months)

Site to see home sizes, etc?

You can put in your zip code and you can see what’s available.

Most of the manufacturing facilities have their own website.

Community operators pay dealer wholesale prices. 21st Century does not markup home to the operator.

cmhcommunitycalculator.com

Would you finance homes in a park that is owned by a Canadian but the park is in the US?
Yes.

If you have 2 parks with 5 vacant lots each, could that work?
Yes.

If the operator has any park owned homes, they can also use this program in the future. (did I hear this right?)

Does Park Operator collect loan payments?
Customer has two relationships -

  1. 21st Century - Tenant pays mortgage to them
  2. Park Owners - Tenant pays to Park Owners
  3. If down payment is financed back to Park Operator, Park operator will pay 21st

All LLC members guarantee the loan or just the manager members?
Depends on financial strength of the members - May not look at all partners if the managing partner can qualify on their own (I believe that’s what he meant)

Rent Credit / Lease Option Agreements - will you work with them?
Lease Option - Yes. But need to look at the contract. Have to be careful that it’s a true lease option.
Rent Credit - Customer needs to be invested into the home.

How will rise of interest rates affect program?

  • 21st is not borrowing from banks. Borrowing from Berkshire.
  • 21st does not anticipate interest rates going up soon
  • Right now Park Operators buying 9% down to 4.5%
  • If rates go up to 10%, then maybe operators will buy down to 5.5%

Can Park Operator make a profit off the homes they sell?
Maximum margin of sales is limited to 10% margin - to help incentivize sales people and offset some marketing costs.

End of Webinar

400 homes ordered through this program by Frank and Dave’s Parks (31% of the 1,300 homes)

5 Likes

Thank you. Nice notes. Very helpful!

Mr. Buffett is a very, very smart operator and knows how to put a hook in a park owner and make them feel no pain.

I agree - Buffett is a smart man ^^

What do you see is the major downside risk for the operator?
(That we’re basically buying inventory from Clayton (as we have to personally guarantee it))

Do you see demand in MH housing going down?

Seems to me like the big question - will they do enough deals to service demand from Park Operators?

Wow, great write up, thank you! Honestly these are much, much better terms and structure than I would have expected. So, just to see if I’m understanding correclty, would the following be an accurate hypothetical scenario?:

Theoretical numbers:
Tru Home - $20,000
Setup Cost - $4,000
Advertising and manager incentives - $1000

The home gets delivered with no out of pocket money from the park owner, and the park owner pays the $5,000 for setup and incentives, shortly after which 21st Century cuts the park owner a reimbursement check for $5,000.

Then, the tenant who comes in and get approved has to put down $2500 (10%). Meanwhile, the park puts down $4500 (18%) up front, or gets financed at 9%, 5 year fully amo.

This then leaves a remaining balance of $18,000, which is a loan between 21st century and the tenant @ 4.5% interest 10 year fully amo. (personally guaranteed by the park and the park operators/owners).

Is the above scenario correct?

@Noel_S
Yeah… I’m no expert but that seems about right.
I’m not sure if Ads / manager incentives gets folded in though.

The program does sound pretty good.
My question - will they have the volume to take care of demand?
I had a friend trying to get more info about being accepted into the program and he didn’t get very far - might be because he was just making offers on parks and hadn’t gotten one yet.

But if you hear anything about that, feel free to post as I’d love to know more about that side of things!

Glad the notes helped. ^^

@doodlefan
Thanks! I hope it helps.
If you use the program and have any updates, feel free to post.
I’d love to hear more real life experiences from others ^^

@carl
Forgot to tag you in the last post ^^