One of my earliest customers used to sell homes for a “stick” builder. His interest in a modular home for his family was motivated by two things: faster construction time and better cost controls. However he wasn’t yet convinced that modular homes were better built. And he doubted they were less expensive, at least to start. But from his past experience, a stick home always took longer, which cost more money, and often created sizable cost overruns.
Turning Gray into Black for the Builder
I of course agreed with his points about speed and cost overruns, and asked him to tell me more. He surprised me with a brief anecdote that I’ve never forgotten and often shared with others.
“Let me tell you about my boss. About once a month we’d have a sales meeting and he’d almost always find an opportunity to tell us that our job was to turn gray into black for the company. He never tired of explaining that there were gray areas in his customers’ contracts. It was our job to turn these gray areas into black. The more gray areas the better, since change orders made him most of his money.”
Turning Gray into Red for the Customer
My customer added, “What my boss would never say aloud was what this magic meant for his customers. By turning his contracts’ gray ink into black ink for his bottom line, he busted his customers’ budgets with red ink. I’ll be damned if that’s going to happen to me. Since building a modular home forces you to specify everything in advance, there’s not much chance of being surprised by last minute change orders.”
Turning Gray into Black for the Modular General Contractor
My customer was definitely right about modular homes. (Here is how modular homes help you avoid costly, unbudgeted surprises.) However, as I explained to him, there’s plenty of opportunity for a modular general contractor to write his contract in gray ink for the foundation, site work, button-up work, and construction of site built structures.
Eliminating Gray for the Customer
The real issue is not the type of construction, it’s the type of documentation. Whether you build a stick, log, panelized, or modular home, the only way to avoid the damnable red ink is have your builder fully document the scope of work, specifications, and costs. He should do this by itemizing every detail, and he should specify which items are excluded and which are priced as allowances.
Recently I took some continuing education courses to renew my Construction Supervisor license for Massachusetts. One of the courses discussed the requirements for contracts between builders and customers. The instructor, who was an attorney, told a story about a builder who had – and then lost – a building permit. I’m very glad this has never happened to any of my customers, and I hope it doesn’t happen to you.
The Building Permit that Wasn’t
The builder sought the attorney’s help after he was denied a building permit for a property he had purchased. In fact, the building inspector had already issued the builder a permit, but the zoning board required the building inspector to revoke it. To make matters much worse for the builder, he had already installed a foundation and framed much of the structure – it was a stick built home.
The attorney learned that the builder seemingly had done nothing wrong. He had submitted a complete permit application along with the other required paperwork. The building inspector reviewed the application and issued the permit. The builder began work immediately. But after installing the foundation and framing the exterior of the home, an abutter contacted the town and said the builder’s property was not a legal building lot. The abutter reminded the town that 20 or 30 years earlier another builder tried to get a permit and was turned down.
The problem was that the lot didn’t have the minimum square footage required by the town’s zoning regulations. It was about 10 square feet short. Apparently, the building inspector didn’t notice this when he “reviewed” the application. (The builder foolishly didn’t verify the claim by the seller of the property that it was a legal building lot.) After confirming that the abutter was correct, the building inspector was forced, by law, to revoke the permit.
No Solution for the Disappearing Building Permit
The builder attempted to buy the 10 square feet from the abutter, who had plenty to spare. But the abutter didn’t want a house on the property, not even when the builder offered a very generous payment. The builder then applied for a variance with the town. But the zoning board shot down the variance. Some disagreements between the building inspector and zoning board likely contributed to the ruling. In the end the builder had to take down the framing and remove the foundation at his own expense.
No Recourse for the Revoked Building Permit
It might surprise you – it certainly surprised me – that the builder did not have grounds to sue the building inspector or anyone else in the town for mistakenly issuing the building permit. The builder also couldn’t go back to the seller of the property because he had purchased the land for cash without the aid of an attorney and without a written agreement that represented the property as a legal building lot.
The attorney concluded that if you are buying a property, always use an attorney and have them confirm in writing that the property is a legal building lot. Also, make sure you discuss with the attorney what you need to do to secure a legal building permit. If a problem emerges later, you will at least have recourse with your attorney.
If you’re like me when shopping for a big item – such as a car, TV, or house – you want the best combination of quality, delivery time, and price. Too bad it’s impossible to maximize all three at the same time, especially when building a home. A builder can build your home with good quality and service. He can also build it fast. And he can even build it cheap. But he can only do 2 of the 3. You’ll have to choose which two are most important to you. Here’s why!
Fast and Cheap
If you want your builder to build your home fast and cheap, his quality and service won’t be as good. First, he can’t deliver good quality without receiving enough money to pay for the better materials. Second, he can’t deliver good quality or service without enough money to pay himself as well as his employees and subcontractors for the “extra” time required to properly plan his work and complete his tasks with better craftsmanship.
Fast and Good
Your builder can also build your home fast and with good quality and service. But he won’t build it as inexpensively as he could, since he’ll need to apply more resources to the project – all at the same time. Unfortunately this is not the most efficient way to build a home. Also, it might require overtime pay for his employees. In addition, your builder will need to convince his other customers to accept delays on their projects, which might cost him some financial concessions. Worse, if he makes his other customers unhappy, it might cost him his reputation.
Good and Cheap
Your builder can also build your home cheap (“affordable”) and with good quality and service. But it’s going to take him longer because the only way he can keep his price down is to give priority to his other customers who are not getting your steep discount. So he’ll squeeze you in as time allows.
You Choose: Good Cheap or Fast
Which two are most important to you? If you talk to people who’ve built a home in the past, they’ll say you get what you pay for. They’ll also mention that if you get it wrong, you’ll regret it for many years to come. After all, you’re more likely to forget how fast and cheap your home was built than how well it was built.
By the way, if you Google “Good Cheap or Fast”, you’ll find many articles about how this point applies across a wide range of industries. You can make tradeoffs between good cheap and fast to give you some of each. But t you can’t have it all.
For more information about deciding between building a home Good Cheap or Fast see Selecting a Modular Home Dealer, Selecting a General Contractor, and Building a Modular Home on Schedule in my book The Modular Home.
Your Preconstruction Modular Dealer and Financing Tasks
This post will focus on the modular dealer and financing tasks you must complete before you home is delivered to your property.
Building your home on schedule takes every bit as much planning as building it on budget. In fact, if you put a lot of effort into planning both, you are likely to find that keeping on schedule is considerably harder than staying on budget. That is because you can determine what you will get and how much you will spend before construction begins, and almost all – but not all – of the required decisions for building a modular home are reasonably predictable and within your control. This is not true for scheduling, since there are so many other players involved who will not always bend to your will, including the surveyor, engineer, utility company, building inspector, modular home dealer, modular manufacturer, and modular general contractor. You may even find that your own personal and family obligations become an obstacle to maintaining your schedule.
There are two very separable timelines when building a modular home. The first – the “preconstruction tasks” – includes all of the tasks you and your lender, modular dealer, modular manufacturer, and modular general contractor need to complete before your home is set. You are primarily responsible for making final decisions about your modular and general contracting drawings and specifications and for completing those tasks related to obtaining a building permit and financing. The second timeline involves those tasks the GC needs to complete after your house is set. This post and the next two will focus on the “preconstruction tasks” that must be completed before your home can be delivered and set on its foundation.
Your Modular Dealer and Financing Tasks
- Sign a contract with the modular dealer
- Apply for financing (if you are using a lender)
- Receive the dealer’s first draft of the modular preliminary plans and specifications
- Meet with the dealer to revise the modular plans and specifications
- Specify where the GC wants to locate the electrical meter on the modular home
- Design the second story floor plan for the unfinished cape or attic
- Tell the dealer what special building codes are enforced by the building department
- Tell the dealer what matching materials the GC needs to complete the site-built structures
- Tell the dealer what rough openings the GC wants framed in the modular home
- Tell the dealer what site-installed flooring and baseboard specifications the GC wants for the modular home
- Receive the dealer’s second draft of the modular preliminary plans and specifications
- Meet with the dealer to sign off on the plans and specifications
- Authorize the dealer to complete the modular permit plans
- Pay the dealer the balance of the required deposit
- Receive the dealer’s modular permit plans
- Deliver a copy of the bank’s commitment letter to the dealer
- Deliver a copy of the building permit to the dealer
- Deliver the bank’s assignment of funds letter to the dealer
- Authorize the dealer to build the modular home
- Send the dealer a certificate of insurance
- Pay the dealer the modular balance due in full
- Remain present during the delivery and set
- Complete a walk-through inspection for warranty work and material shortages
For a detailed schedule of when each of your modular dealer and financing tasks must be completed, see Building a Modular Home on Schedule in my book The Modular Home. The chapter identifies all of the players, the tasks they must complete, and the sequence in which the tasks should be done. It also explains your responsibility for completing each of the tasks
This is part three of a three part blog that explains what you need to know about your modular home financing. In my last post I explained the significance of the final modular home payment and option of paying either COD or by an assignment of funds agreement. In this post I add more details.
Modular Home Financing: Whose Name Should Be on the Check
Some lenders insist on making the final modular home payment in the name of the customer even though it’s owed to the dealer or manufacturer. Others allow the name of the modular dealer or manufacturer to accompany the customer’s name. When the modular home payment is in the customer’s name, either alone or along with the dealer’s or manufacturer’s name, the customer must endorse the check before the dealer or manufacturer can cash or deposit it. Modular home dealers and manufacturers almost never accept a check in the customer’s name alone for an assignment-of-funds payment, and only some dealers and manufacturers will accept a joint check. The reason is that when the customer’s name is on the check, the customer unilaterally gets to decide if and when the dealer and manufacturer are paid, which defeats the purpose of the assignment. Given that the modules will already be on the foundation when the check is handed over, the dealer and manufacturer do not want to allow the customer to have this much control. Accordingly, most modular dealers and manufacturers insist that the assignment-of-funds letter state that the check will be issued in their names only.
If your dealer insists on receiving the modular home payment only in their or their manufacturer’s name, bring this to the attention of lenders before applying for financing. The best way to ensure that a lender and dealer can work with each other’s policies is to ask the dealer to give you a sample of an acceptable assignment-of-funds letter before you select a lender. You can then ask each lender to approve the letter. If a lender asks for some modifications to the dealer’s letter or proposes their own letter, and the dealer is not agreeable, you will probably need to find a different lender or dealer.
Modular Home Financing: What if Your Lender Won’t Make a COD Payment
If your modular home dealer and their manufacturer require a COD payment and you are unable to find a local lender to assist you, your dealer is likely to know which lenders will comply with this requirement. To avoid a misunderstanding, you and your dealer should ask the lender to write a letter committing to pay for the balance owed on delivery.
Modular Home Financing: Are You Vulnerable after You Pay for the Modules
You might wonder whether paying the modular dealer and manufacturer in full on delivery or immediately after the set compromises your leverage should you subsequently find something wrong with your home. You certainly do lose leverage. This is exactly why you should shop very carefully for a dealer and not just buy from whoever is the least expensive. Just as you should never buy a car from a dealer who has a reputation of not providing good warranty service, you should never buy a modular home from a dealer who you are not confident will honor their warranty obligations. Regardless of when you pay a dealer, your warranty is only as good as the dealer’s integrity and competence.
Modular Home Financing: Why the Disbursement Schedule Is Important
In addition to verifying that a lender will meet your dealer’s modular home payment terms, you also need to ensure that it will agree to an acceptable disbursement schedule. This schedule states how much money will be disbursed at each phase of the construction process. Most of the details are worked out by the customer and their GC, since the general contractor will require several separate disbursements, but the customer and dealer are responsible for ensuring that the schedule disburses the full amount at the correct time for the modules.
A lender may agree to an assignment-of-funds procedure but then offer a disbursement schedule that fails to allocate sufficient funds to pay the balance due on the modules. Since the dealer is unlikely to agree to a partial modular home payment, you need to inform prospective lenders about the dealer’s payment requirement before selecting one. If a lender’s schedule does not provide you with sufficient funds at the right time, and you call this to the loan officer’s attention before you sign the loan agreement, a lender will usually adjust the schedule to accommodate your needs. After you sign the paperwork, however, a lender will usually resist changing the schedule, which will likely force you to find a new lender.
Modular Home Financing: Why Using a Lender Takes More Time
Keep in mind that it will take longer to receive your home if you use a construction loan because the modular manufacturer will wait for the lender to write its assignment-of-funds letter before putting your home into the production schedule. And the lender will probably wait to write the letter until you have closed on the loan, which likely cannot happen until you have a building permit. As you approach the closing on your loan, do everything you can to prepare your lender to write the letter immediately after the closing.
A couple of weeks before the delivery and set of your modular home, ask the lender to schedule its representative to inspect and approve the modules and disburse the balance due. The inspection and modular home payment will be required by the lender whether the payment terms are COD or assignment of funds.
Modular Home Financing: Why You Might Need to Pay COD When Using Private Funds
When you use a private source of funds to pay for some part of the balance due on a modular home, the dealer and their modular manufacturer are likely to require you to pay for the modules when they are delivered. A COD modular home payment will need to be made with a bank or certified check made payable to the dealer or manufacturer, as instructed by the dealer. Needless to say, you will not be obligated to pay for the modules if the dealer and manufacturer built you the wrong home, a situation that is very unlikely if you select a reputable dealer.
Modular Home Financing: Why an Additional Deposit May Be Needed If You Are Using Private Funds
If you are paying COD, your dealer may require an additional deposit for each module before they will schedule your home to be built. These additional funds will serve as insurance for the dealer should you fail to pay when the modules are delivered. The dealer will use the additional deposit to defray the expenses they will incur if they have to return the modules to his manufacturer or sell them to another customer at a discount.