Richard Palumbo, Custom Modular Designs
NuWire: Can you give us a quick explanation of what modular homes are and what they are not, in order to clear up some common misconceptions of them?
Palumbo: A modular home, contrary to some common belief, is not a mobile home, not a trailer home and it's not a HUD home. It's not a panelized home or a kit home. A modular home is a system-built product—that is a home that is designed in accordance with state and local building codes, and then built in sections, boxes or modules. It is built in a factory that's climate and quality controlled. I like to think of a modular home as a better built home, for a number of reasons. First, it's built in a climate controlled factory as a system-built product with all of the efficiencies of volume associated with manufacturing. It is built to a specific set of specifications and can be as standard or custom as the customer requires. Typically, 30 percent more material goes into a modular home with 30 percent less waste.
NuWire: What is it about modular homes in your opinion that should make them appealing to investors and/or developers?
Palumbo: I think there are a number of aspects to modular homes and modular buildings that would make them appealing to investors, builders, developers.
Number one, they cost less to build, primarily because of the efficiencies of a factory setting. The example I like to use would be that of...cabinet making. In the 1920s, 1930s, it was very typical for cabinets to be built on site. All of the individual building components were brought to the site, and then actually installed in pieces. That would be analogous of a site or stick built home as compared to a modular home.
Modular structures are typically better built homes, multi-family buildings and office buildings because of the efficiencies of a factory and because the product is built in a climate-controlled environment where the material is never wet, never snowed on, never rained on, etc. This dry, climate-controlled environment pretty much eliminates a common problem in the home and multi-family and office building industry: sick building syndrome and toxic mold and mildew infiltration. A growing area of litigation is toxic mold and mildew litigation. A leading cause of mold and mildew in homes and office buildings is high levels of moisture and poor ventilation. Modular construction should help to eliminate these issues because modular structures are built dry.
In addition, modular construction is much faster than site building. If you are a builder or developer and you're borrowing money, paying interest on that money to build a home, multi-family or office building, you're not paying interest for six months or 12 months. Instead, you're paying interest probably for a period of one to three months (depending of course on the size of the project). The modular lending products are very similar to typical construction lending—the distribution payouts are different. Modular structures are insured like site built structures and are appraised the same as a site built buildings.
NuWire: What is the typical price per square foot on modular homes?
Palumbo: The modular portion of the product or of the project is generally in the range of $55 to $75 a square foot. And that's going to be affected primarily by the product you choose. For example, does the building have an entry-level cabinet, a middle-grade cabinet, or a designer/custom type cabinet? What are you using for flooring surfaces? Is it a plush carpet or a berber? And what are the construction methods (2x6 16” on center or 24” on center, OSB or plywood, etc.)?
Our company offers our Assist-U-Build Modular Building Program. Under this program, a homeowner, builder or developer acts as the general contractor. Custom Modular Designs provides the modular aspect of the project. Under our Assist-U-Build program, the average cost per square foot (finished) is $90 to $125. That's compared to $150 to $200 a square foot in stick or site construction.
NuWire: How does delivery of the homes work? Are buyers potentially limited on which types of properties modular homes can be placed on?
Palumbo: We coordinate, supervise and pay for the shipping, and that price is included in the cost of the actual product that's brought to the site. We also coordinate the set of the home, the crane and anything else it takes to get that home onto the customer's foundation and to make the home weather tight. I should mention, this varies pretty widely throughout the industry. Some factories coordinate their own shipping. Some dealers leave that up to the customer. We think it's best to handle all of the modular related aspects of the process because most people are not familiar with the modular aspects of the project including modular designs, transportation and the installation of the modular project. Our builder and developer clients typically find that using our Assist-U-Build program saves time and money by avoiding costly mistakes based on their unfamiliarity with the modular product.
Generally, modular homes and modular structures can be shipped anywhere. I should qualify that—almost anywhere. For example, mountainous areas and islands can sometimes be problematic. Factories that we deal with have shipped homes to Nantucket, Long Island, Martha's Vineyard, Block Island. On occasion you'll find a lot or a location that's not accessible; it typically comes down to the width of the road. You need a pretty standard width size on a road; 15 feet is pretty much a minimum to get the boxes down a road. So on occasion you'll find a lot [that is] unusually obscure that won't be conducive to modular construction. But it's the exception as compared to the rule.
NuWire: Does the delivery cost vary?
Palumbo: As a general rule, the cost for the modular transportation comes down to miles. Generally speaking, it costs so much per mile to ship our modular homes.
The factors that can affect the overall transportation costs come down to, number one, whether or not the load is the standard width load, which means 13 feet 9 inches or less, or whether it's oversized, up to 15 feet 9 inches. If it's oversized, you need a transport vehicle and in some states a police escort through the state; that will affect costs to a certain extent. Usually good designs can eliminate the need for oversized boxes. There are additional shipping costs associated with shipping to certain areas. For example, when shipping to islands you would have the additional cost for barges as well as load and unload type fees that can drive the costs up. But typically it doesn't drive the total cost up to a point where it's cost prohibitive because the cost of building in those locales is already inflated because of the locations. So the little bit of extra shipping cost typically is not cost prohibitive to the overall project.
NuWire: How long does construction normally take on these homes?
Palumbo: Typically from the time the home is ordered...our factories will be able to produce and deliver the home within four to 12 weeks depending on the time of year, depending on the size, design of the home or building and depending on the client's needs.
NuWire: Have you had to deal with any kind of zoning restrictions in the placement of modular homes, or typically are they treated the same as stick built homes in that regard?
Palumbo: We have not personally dealt with any kind of exclusionary zoning, etc., regarding modulars. In the past, the industry itself has met some resistance, primarily because people confuse and sometimes building officials confuse the difference between modular or mobile or trailer park type of homes.
In today's world, most building officials and cities and states and zoning boards are very familiar with the modular product, and most of them enjoy working with it because it eliminates the amount of work that they have to do because most of the modular built products or all of the modular product is actually inspected by a second-party or third-party inspection company right at the factory.
NuWire: How are the resale values normally of modular homes? Are they...on the same level as stick built homes, or higher or lower?
Palumbo: I would say the resale value for modular homes as compared to stick built or site built homes and multi-families and commercial buildings are about the same. There's no difference in the appraisal process, there's no difference in really the value as far as how the value appreciates. My personal feeling is that the resale value of modular homes will eventually be higher or will surpass that of stick and site built because of the quality that goes into them.
NuWire: Is construction financing available on these homes? And if there are differences between these homes and stick built homes in terms of financing, what are they?
Palumbo: Construction financing is available. It's similar to general construction lending in that there's a disbursement schedule as the work is completed up until the point where your site work is completed and your foundation is in pretty similar as far as that portion of the product.
Where it really diverges is the difference between the payment schedule after that point. The modular product shows up on carriers that are then lifted from the carriers with a crane and set onto the customer's foundation...and the lenders take that into consideration because the product is showing up probably 80 to 85 percent completed, as compared to...lumber showing up and then being installed on the foundation and having a rough inspection and the lender will disburse and you'll have maybe three to five disbursements as compared to one when the home shows up.
At first, the lending industry was a little recalcitrant to adjust itself to the modular industry because...most modular companies require curbside funding. I've seen a huge change in the last four years in that industry, and more and more mainstream lenders are eager to work with modular builders and people who want to build modular homes....They started to recognize the value and the growth in the market.
NuWire: Do you see in some U.S. markets that it might be cheaper to build stick built homes versus modular homes, or do you think that modular homes are always...cheaper?
Palumbo: I can speak for our market, which is primarily the Northeast. We service from Maine to Virginia and then we go out as far as the western border of Pennsylvania. In our market, I don't think that a site built product is ever cheaper, when you're comparing apples to apples. I would think that in most instances (even outside our market) the same factors would apply based on the efficiencies of a factory. Even traditional stick builders and site builders are beginning to use our product, and a lot of our clients and customers are builders and developers.
NuWire: Is there anything else about modular homes in particular that you think people should know about?
Palumbo: From an investor's standpoint, I think one exciting area of modular construction which a lot of the factories are starting to now integrate into their system built product is what we call green and sustainable living. This includes a combination of use of renewable products and renewable resources: wood that's designed to be used from renewable trees and lumber as compared to old growth forests; highly energy efficient homes, solar power, creative types of power as well, like for example split systems...geothermal heating and cooling. A lot of the modular factories because they can do it on a wide scale basis are starting to implement these types of this green and sustainable living into their products, and I think that's exciting from an investor's standpoint because it's going to make for not just a good investment but a nice clean investment.
NuWire: How much do these [green] homes cost per square foot?
Palumbo: The green products are probably 10 to 20 percent higher [than standard modular], not including...the costs of solar panels or some of the local type stuff. But they're not priced way out of the market where they're not cost effective; they're becoming more and more cost effective.
NuWire: And how do you see the market receiving those? Are people kind of becoming more interested in them, from what you've seen?
Palumbo: I've seen a real acceptance towards them and a lot of interest, especially some of the simple things, for example, some of the creative new insulations. One example, for example, even on a standard modular product, the standard...single family home in most locations would be let's say a two by four construction, 16 on center, with an R-13 insulation. Compare that to...an entry grade modular home at two by six construction with R-19 insulation. A 40 percent more insulation value just in the walls on a standard, standard product as compared to site built. And they have some innovative insulation products for very...small up-charges, 10, 15 percent on insulation you can go from R-19 to R-21.
We have windows that are routinely used...that are argon filled. So some of the more basic energy efficient techniques are already incorporated into the basic design in that $55 to $75 a square foot range. And as you start to get into some of the more intricate aspects or the less popular aspects like solar passive, meaning the design of the home is designed to stay cool in the summer and heat in the winter, and then some of the funkier type of aspects like shingles that look just like a regular asphalt roofing shingle that actually is a solar panel itself, and that's installed to a roof, those are still in the early stages and not as widely accepted. It pretty much spans...quite a large expanse as to our options as to the acceptability of the different aspects. But it's definitely the direction of the market—high efficiency, green living, renewable resources.
