A Question of Value Revisted, por NADA (long!) - Posted by David Butler America's Note Network

Posted by David Butler America’s Note Network on May 06, 2000 at 22:10:08:

In reviewing some of the posts that are frequently made to this site, and the several discussions I have with many note brokers, it is apparent that there is a great deal of misinformation and misunderstanding about the mobilehome marketplace, and more particularly the role of the NADA Manufactured Housing Guide in evaluating these types of properties.

The mobilehome marketplace offers perhaps the greatest opportunity for profits in both the creative real estate investment, and the discounted note investment industries, over the next three to five years. Under current market conditions, and the new round of problems developing in the already fragmented institutional mobilehome lending marketplace, those of us who are active in this sector are likely to enjoy some of the best returns, and most dealmaking opportunities, that we have ever seen. I thank Terry Vaughan every day for persuading me to enter this segment of the market four years ago!!

But mobilehome investment can be a deadly minefield, especially for the inexperienced. The key to profitability lies in risk assessment and risk management. Ultimately, these two risk factors are grounded in property value. My particular preference is investing in notes on mobilehomes in parks (i.e. without land) and I am focusing the remainder of this discussion entirely on the discounted note end of it, although many of the points made will be helpful to “Lonnie Dealers” as well.

Proper deal structuring based on proper valuations are the PRIMARY weapon we have to effectively mitigate the risk element in mobilehome note investments. The paper itself must be throughly evaluated, based on the many factors related to note evaluation - I provide my own five-page grading and pricing guidelines to the many note brokers who offer me mobilehome paper. These factors do figure prominently into the price I will pay - but ultimately, it is the value of the home itself that will dictate how much money (ITV - Investment to Value) I am willing to invest in a given note transaction, and how I will structure the terms of the purchase of the note to control my risk exposure.

It therefore stands to reason that I must have a handle on valuation. There is no such thing as “absolute value” for most investments - this is especially true for real estate investing (including mobilehomes for the purposes of this discussion). Neither is value a purely subjective thing, as many investors erroneously believe. An individual’s isolated opinion of value may often be subjective (in a Seller I call this a serious case of “Pride of Ownership”) - however, any individual investing purely on his subjective opinion of value is operating in a vacuum, an inherently dangerous process.

Part of pricing for profit going in, must be formulated on a profitable exit strategy - and formulating this exit strategy requires effective research based on objective criteria, so much as objective data is obtainable, and quantifiable. On general terms, objective criteria is derived from the marketplace, which in turn, is based on the sum of group activity.

In the mobilehome arena, an excellent place TO BEGIN the valuation process is the NADA Manufactured Housing Appraisal Guide. The Guide is a highly technical manual, featuring a ton of relevant information related to construction, condition, location, park ratings - AND the effect each of these factors has on the value of a given unit. It is not difficult to learn how to use, but it is tedious - subsequently it is often not used effectively, which may explain in part why so many people fail to use it correctly, or fail to use it at all. I suspect this difficulty also leads many to inaccurately label the use of the NADA Guide as a “shortcut” - the reality is, used properly, the NADA Guide is a laborious process, far from being a “shortcut” to anything, other than a quicker learning process.

It is also subject to a great deal of misperception, often being confused with “Blue Books” as they are used for the automobile industry, and other personal property valuation guides. The two are entirely different, and they draw on entirely different research methodology. For Its Manufactured Housing Appraisal Guide, NADA uses nine separate research databases to arrive at both the values published, as well as the percentage adjustments applied in reconciling those values to account for the many factors affecting the base values. It further refines these adjustments by regional economic characteristics, defined at the outset by the 10 regional codes that NADA has developed for the entire country. These codes are further refined by state adjustments.

It is useful to note that a great deal of the valuations are developed from SALES data (i.e. what the things are selling for). This data is constantly updated, and republished every four months. Some of these databases include U.S. Department of Commerce Housing Starts Regional Studies (which include manufactured housing); dealer sales reports, state titling agency figures; tax records; institutional lending data; AND, the hard sales data provided by appraisers USING the NADA National Appraisal system. These are many of the same kind of research databases a qualified real estate appraiser might rely on, for determining “market value”.

It is also worth noting that the Guide is THE only approved reference accepted for HUD and DVA mobilehome appraisals, which has ostensibly been extended to include FNMA and FHLMC underwriting requirements. There is a reason for this, and I don’t believe it is a government conspiracy to help sell NADA Guides. But, there is an important caveat - the Guide is intended to be used AS A CRITICAL PART of NADA’s TWO-STEP National Appraisal System.

NADA itself strongly INSISTS that the Guide (by itself) is not to be used in determining market value, and with good reason. Many users neglect to reconcile values by following the necessary steps provided in the Guide. They simply go to the base value and call it good, or they fail to equate the specifics of measuring value between the Subject Property, and the ENTIRE NADA guidelines. Moreover, even major lending institutions frequently fail to use the system properly. It costs more money (when including the NADA National Appraisal System Kit), and it takes more time.

The NADA Guide is used to determine average retail market value in a given area. By way of definition, in this respect it is roughly equivalent to the MARSHALL & SWIFT Guide, used by real estate appraisers, including the more professional residential appraisers. NADA only represents that the Guide, by itself, will establish the accurate replacement cost value of a given property. I disagree to an extent.

From my own experience, I find the NADA Guide to be the rough equivalent of a MARSHALL & SWIFT Guide, an MLS sales database and title company “property profile” kit, all rolled into one. Oddly enough, in evaluating several hundred mobilehomes in parks, I can only remember my NADA value being on the money or higher than the field review on several rare occasions. Almost always, my NADA value reconciliation is lower… in many cases much lower (like the paper coming out of Vegas). Thorough research indicates the large discrepancies are usually due to financing marked by extremely low down payments to C and D credit risks, with Sellers often cranking up the sales price in a misguided effort to offset the risk.

In the hands of a knowlegable user, the NADA MH Appraisal Guide is a powerful weapon when properly used. In the hands of a newbie, it can be a powerful learning device, if properly used. In the hands of a bonehead, like all powerful weapons, it can kill the user!

For investors, much like an airline pilot, or a captain at sea, knowing when to fly by the seat of your pants is a valuable skill. But even these skilled commanders have a frame of reference. It has been said that the common thread between ships lying on the bottom of the sea is that they all have a “chart room”. Like many cliches, this observation is based on sophistic reasoning - inasmuch as all ships have chart rooms, and more have sailed than have sunk. It is much more likely that the ships on the bottom failed to properly USE their chart rooms, whether their skippers where well seasoned, or on their maiden voyages.

If memory serves me, the Titanic is a monumental testament to the failure of TWO very experienced skippers (Titanic AND Carpathia) failing to go by any part of the book!