Saturday, September 15, 2012

Modular Housing's Big Decision

Not too many years ago, modular home factories only gingerly stepped into the commercial modular ring. I can remember several companies including one that I worked for actually telling their reps not to go after anything that wasn’t single family housing.

My, how times have changed. Today there is hardly a modular home factory that isn’t looking for large projects like dormitories, motels, apartments and townhouses. The housing crunch forced most factories to fill their production lines with lower profit modules that they would have never touched prior to 2008.  A good example is the Homark Homes story today about their “man camp” projects being 50% of their total sales for the year.  Could they have survived if they hadn’t got the order?  Maybe, but now they won’t have to find out.

Developers don’t care how their projects get completed, only that they come in close to budget and within their time frame. One thing the factories had to learn the hard way was that developers don’t pay for their modules either as an “assignment of funds” due within 3 days of delivery or with “curbside” payment. 30, 60 and even 120 day payment is being accepted as normal for these projects and many factory owners have had to go to their banks looking for additional operating capital.

As a side note….This is what makes the $60M that Blu Homes just received from an investor even more puzzling. The investor is betting on the future of a company with no large production numbers while several traditional modular factories were hitting the sidewalk searching for money (high interest rates) to keep them afloat until their big projects were paid. If you bet on horse racing, that would be called a “sure thing.”

There is also a downside to taking on large projects; losing the single family builder.  For example, you are a builder that buys 12 modular homes a year from a factory and until now you have been getting homes on a timetable that works for you and your customer. Now what happens to your contracted home when your sales rep tells you that your home will be pushed back 3 weeks so that the factory can complete a very large production for a developer that is running behind schedule? 

The answer is quite simple. You shop your next home around until you find one that isn’t too busy to produce your home when you need it. There are factories that actually have spare production lines available for just such a situation. Some have multiple locations they can build from and others have idle production lines at their current location.  Most modular home factories have production lines that can expand to handle a medium size project with little consequence to the builder but if we are talking about the large 100+ module size orders which could tie up a line running at full production for upwards of a solid month, then you just have to weigh the benefits. 

This is a large project from PBS in Middleburg, PA.  Contact Nick Lust for more information.

Modular home factories are quickly coming to a crossroads. One direction points to continued project sales with a dwindling SFH builder base while the other direction shows the Federal government opening up $40B a month to banks for single family homes.  Lucky are the factories that have planned to go in both directions.  


William said...

Coach, with virtually every mod company still in operation are bidding on these work camps - whether they be in Canada, northwest territories, Dakota, etc. But with all the bidders bidding to the same specs is it not logical the determining factor is price and delivery schedule? This then begs the question - how much profit in the deal for the manufacturer? Is taking a contract the step that saves a closure or is it long term business that makes the operation profitable and sustainable? I hope it is the latter.

Congrats to Homark and the other manufacturers who have solicited this type business and won contracts.

Anonymous said...

Coach, everyone acts like big money private equity guys are dumb. More likely they set very strict goals and timelines for money to be released. Its not like a mortgage where the bank hands you money and hopes to get paid back. These guys are tough, very results oriented and demand 200% in work every day. I dont think its dumb on their part, I think its more a wakeup call to the factories that didnt get their call, that their managements, factories and thinking is out-dated