21st Mortgage CASH Program: Heaven Sent, Or...?

By now most MHP operators have heard of or used the CASH program to finance mobile home purchases.

It’s an ingenious lending program run by 21st Mortgage, which you or your vendors have mistakenly called ‘21st Century’ more times than you’d care to admit.

The CASH program offers operators an expedited path to infill vacant lots while minimizing precious capital for new home inventory.

We used this program across several different markets with varying degrees of success, which we’ll get into below. But first, why was this program created?

CASH Program Background

21st Mortgage provides financing for mobile homes. Owned by Warren Buffett’s Berkshire Hathaway, 21st is a subsidiary of Clayton Homes, the largest manufactured home producer in the country.

They originate ~$1 Billion in mobile home loans a year and service over $8 billion in MH loans.

Around 10 years ago they created the CASH program to solves several problems:

1. Park owners need to fill empty lots but can’t (or won’t) pay for the homes

2. It is a pain in the ass to find and move used homes for infill

3. 21st mortgage needs to create a lot of high yield loans

4. Clayton Homes needs to sell more homes

What resulted was the CASH program and it’s kind of genius (especially for 21st + Clayton).

Effectively, 21st mortgage will help infill your park with spec homes, ordered by the park owner, and will provide financing to prospective home buyers.

The park owner gets a year to sell the home (at no cost), or they can assume the loan and make it a rental home.

It’s the rare win, win, win. But who wins the most?

Program Requirements

Park owners are required to obtain their state dealers license in order to qualify for the program.

In some states, no problem, in others, huge headache.

**PRO TIP** Contact your state MHI for questions on the state’s dealer license requirement, they can be lifesavers.

If you’re hoping to use the CASH program to fill a couple lots, this is not worth the hassle - in fact, 21st mortgage usually requires operators to require at least 10 homes for them to bother setting you up on the program.

Once you’re approved for the program you can starting ordering homes & 21st will pay the manufacturer directly.

The park operators will pay setup costs that 21st will reimburse.

A few high level loan terms that will likely fluctuate (don’t quote us on these, they could already be incorrect):

• 5-10% down payments

• No minimum credit score for the MH borrow - what do they care, the park + owner is backstopping the loan (in their defense, they are more strict on income and overall debt underwriting)

• 12-23 year payment terms

• Fixed rates in the 7-14% range

• No pre-payment penalties

Couple caveats

1. 21st mortgage allows you 1 year to sell the home, for most strong markets that’ll be easy - but if you’re in a soft market you’d be surprised how long that could take. If you don’t sell the home after 1 year it’s converted to a owner’s note & you start paying the mortgage on it.

2. The sales price of the home is the wholesale price + setup costs + a 10% margin. This can quickly turn an affordable $45k home into a $65k home if you have expensive lot prep/setup costs.

3. There is one BIG catch with the CASH program. 21st requires the park entity guarantee these loans. They also require the park owner(s) to personally guarantee the loans. Ouch.

This is a bummer for owners but you have to applaud what 21st has done here.

With the CASH program, 21st has magically turned crappy subprime debt (mobile home loans) into investment grade paper with sky high interest rates.

Bravo.

Highly profitable, secured loans with low default risk. Uncle Warren must be proud.

Sales Process

Your onsite manager will be required to show available homes & walk buyers through the financing process. Luckily, the 21st Mortgage support team is extremely helpful & will hand hold both the manager & buyer through the process.

They can’t do everything for your manager, but they want you to succeed (if you have a qualified borrower ready to buy the home). We’ve had plenty of not so savvy managers successfully take tenants to the finish line.

The qualification requirements are fairly straight forward and 21st has tools to help you run the math, but make sure to pencil out a prospective buyer’s total monthly obligation. We were sometimes surprised to find a nicer home, fully set was starting to competing with condo & small stick built homes in some markets.

Rental Program

Don’t want to sell homes? The CASH program also provides rental homes for your park too.

Rental homes can also be converted to sale homes at anytime. This is a solid strategy to increase occupancy, then get the homes off your books a couple years later.

Our Experience

CASH program works well for:

1. Great markets where demand and average incomes are high.

2. Rentals - that you may or may not be able to covert to a sale in 3-5 years.

We used the CASH Program for several of our properties with overall decent results. Our properties in strong markets with high home prices we were able to bring in & sell homes pretty quickly.

The homes that sat were either priced too high relative to the median home price, or had large competition from cheap used homes from other parks in the area.

Here are a couple tips:

• Double the amount of time you think it will take to get set up on the program. The process is painful.

• Do not let your entire infill business plan hinge on the CASH program.

• Figure out a competitive monthly payment threshold for a buyer (EX: say your market will support a max monthly payment of $1100 a month. With lot rent at $400, mortgage payments have to be <= $700). Use that to back into the wholesale price w/setup costs you target for the program.

• Properly incentivize your manager to put on their sales hats & close the deal. These CASH home sales require significantly more time & effort so we always paid our managers a MUCH larger sales bonus for these sales.

Conclusion

We believe the CASH program is a big net positive for the industry. It doesn’t work for every park, but it’s hard to ignore what 21st has accomplished.

They’ve increased the supply of affordable housing, made value-add MH owners + investors at lot of money (increased occupancy) and have kickstarted the trend to upgrade mobile homes in parks across the country.

Happy Trails,

MHP Weekly