This is part two of a three part blog that explains several things you need to know about your modular home payment. Part two explains the difference between a COD modular payment and an “assignment of funds” modular payment.
Why Modular Home and Stick Home Payment Schedules Are So Different
When customers construct a stick-built home, they usually do not wait until their home is framed, insulated, drywalled, wired, plumbed, and finished with cabinetry, doors, moldings, and flooring before paying their builder. But that is likely what you will do when you build a modular home. Your dealer will probably obtain a 10-percent deposit from you, but not receive the balance until he has built and delivered your home. As you can imagine, the many thousands of dollars required to manufacture a home makes the final modular payment a very significant event for the dealer and his manufacturer, who must also wait until you pay your dealer.
Although most dealers and manufacturers require a 10-percent deposit before they will build your home, some dealers require a deposit of 25 percent or more for a true custom design, since it could be more difficult to sell than a standard plan should you not honor your contract. Many dealers also require an additional deposit when you are paying with private funds, as will be explained below.
A few modular dealers will give you priority scheduling or offer a small discount if you prepay for the home. But you will only want to take advantage of that if you are sure the company is financially sound. Normally, you would pay off the balance after the home is delivered to your site or set on the foundation.
Why the Final Modular Payment Is So Important to the Manufacturer
When a dealer and manufacturer build a home after having received only a small percentage of the purchase price, they are taking a risk. After all, the manufacturer must pay its vendors, factory production crew, and delivery crew. The dealer must in turn pay the manufacturer, whether or not you pay him, since he will have a contract with the manufacturer.
When a customer does not pay for a home, the dealer and manufacturer are compelled to sell it to someone else, usually at a substantial discount. That is why the dealer and his manufacturer will be very concerned about receiving their modular payment in full for the balance owed on a home as soon as possible after they build it. That is also why all manufacturers prefer to be paid cash on delivery (COD), and many insist on it. Most lenders, however, prefer to make the final modular payment after the home is set on the foundation.
Why the Manufacturer Prefers A COD Final Modular Payment
The manufacturer wants to be paid COD because once the modules are attached to the foundation they are legally no longer considered personal property, which is what they are when they are sitting on their carriers. If you do not pay the dealer after the modules are on the foundation, the manufacturer cannot remove them and take them back to the factory, something the laws for personal property allow with a car. The modules are now real estate, and that difference gives the homeowner a great deal of protection against creditors. The dealer and manufacturer would need to get a court order to remove the modules, and this could take months and many thousands of dollars.
Why the Lender Prefers an Assignment of Funds Final Modular Payment
Most lenders take an opposing point of view. They do not want to disburse funds from a construction loan to pay for the modules until they have been set on the foundation. Their view is that they are lending money for real estate, not personal property resting on a carrier. Many lenders, dealers, and manufacturers have reconciled their conflicting demands by relying on what is known as an “assignment of funds” procedure, in which an authorized official of the lender writes a letter to the dealer or manufacturer committing to pay one of them an agreed upon sum after the modules are set on the foundation and inspected by a representative of the lender. This protects the lender and its customer by making the modular payment contingent on an inspection that the home is correct and properly set. The dealer and manufacturer in turn get the security they need by receiving a written commitment from the lender to pay the dealer or the manufacturer once the inspection is complete. In effect, the dealer and manufacturer are relying on the lender’s obligation to make good on its assignment rather than the customer’s obligation to honor their contract. When done properly, the letter assigns sufficient funds from the customer’s construction loan, usually equal to the balance owed by the customer for the modules, to the dealer or manufacturer and promises to make the modular payment either by wire transfer or with a bank or certified check.
For more information about the difference between a COD modular payment and an “assignment of funds” modular payment, see Financing a Modular Home in my book The Modular Home.