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LET’S GIVE UP ON THE STAR SYSTEM
By Frank Rolfe
When I first got into the manufactured
home community business, everyone was obsessed by the concept of a “star” system
– 1 for poor, 2 for mediocre, 3 for average to good, 4 for better and 5 for
best. Owners would love to outdo each other by boasting “my property is a
four-star, how many is yours?” Of course, the system was highly flawed, and
there was definitely star inflation (people always seemed to add a star or two
to their score), but it made for some apparent meaning to somebody (I’m not sure
who). Unfortunately, unlike the hotel business, which takes it’s star system
seriously, and has many independent judges who allocate them and promote the
highest winners, the manufactured home community star system has long been a
joke, and about as accurate as a world atlas printed before WWII.
Why does there have to be a star
system?
Star systems are very useful if they are
consistent and monitored by an impartial source. The best example of this is the
hotel industry. When I am picking out a hotel on hotels.com, the first level of
screening that I am interested in is number of stars. I have no interest in
staying in a hotel with less than three stars. How do I know that the three,
four and five star hotels are superior? Because I have confidence that the
system is being monitored by every travel agency and AAA-styled travel group in
the world. I believe that the trust in the system is such that everyone feels
confident placing reservations in hotels that they know nothing more about than
the number of stars.
The goal of a similar star system for
manufactured home communities is no different. The concept was to be able to
rank, sight unseen, communities from bad to best. This system would be helpful
for customers, banks and buyers, at least theoretically.
Why does the system not work?
If you gave a test to a group of
students without any oversight, and allowed them to grade their own papers, what
do you think they’d get? That’s right, they would all get “A”s. The first
problem with the system is no different. There is absolutely no oversight as to
who gets what number of stars. Every owner is free to pick their own number, and
it’s about two times the real number.
Since no group with authority manages
the star system, there is no tangible value to having a certain star score. If
the guy with dirt streets down the block claims to be a four-star property, then
why bother re-paving your old asphalt to get a higher ranking? It’s like having
a game without scoring, or a debate without a judge. There has to be leadership
that monitors results, reward the winners, and penalizes the losers.
Why it will never work.
Before you can institute a real star
system, you have to have commitment from all the community owners to embrace the
concept and not cheat. Getting the manufactured home community owners in the
U.S. to agree about anything is nearly impossible. With around 50,000
communities in the U.S., realistically, you are never going to great consensus
on anything. And as long as there are enough rogue operators to claim more than
their fair share of stars, the system will immediately break down. Who is going
to hurt their business by claiming two stars, when everybody else is illegally
claiming four and stealing their customers, lenders, and buyers? Nobody.
The other reason why any type of rating
system will never work is that there is no funding to create a group to
standardize and enforce the system. Let’s face it folks, this industry is in
terrible shape financially. The last time I checked my local Manufactured
Housing Association, their dues received could not cover Denny’s Grand Slam
Breakfast for a family of four. In an industry that has been on the ropes for
almost a decade, especially on the retail side, who is going to pay for this
group of inspectors and enforcers? Nobody.
Why the system has been turned upside
down.
You know, it’s really a good thing that
there never will be a star rating system for manufactured home communities. Why?
Because the whole star system does not really work on communities. In fact, it
distorts the truth and is a disservice to, if not customers, then definitely
lenders and buyers.
You see, in all other types of real
estate, from hotels to office buildings, the higher the star rating, the better
the property. This formula, however, falls apart on manufactured home
communities.
The communities that are struggling the
most right now, in my opinion, are the four and five stars. These are the ones
that have pools and clubhouses and big lots. They have everything – except a
winning business model. Most of these properties have lot rents so large that
they are no longer affordable housing. When a customer is paying you as much in
lot rent as a decent apartment costs, then you are definitely in uncharted
territory as far as affordable housing goes. In addition, many of these same
properties have rules on how old a home can be. As a result, there are very few
“paid for” homes. When you add the home mortgage and lot rent together, and get
a number above $1,000 per month, then the customer has many, many housing
options available to them. This leads to reduced demand and, often, customers
walking off and leaving their homes. I have met many four and five star owners
who churn 25% of their tenants per year. That is a terrible statistic.
Often they resort to buying these homes to keep them in the community. Maybe I’m
old fashioned, but when you have to pay your customers to live there, you’ve got
a big problem. On top of that, they are constantly involved in some type of
large capital expense project to maintain all of their amenities and perks.
The properties that some would call
one-star, or even no-star, often have stable tenant bases and are virtually full
with affordable housing clientele. They produce consistent income with little
capital expenditure. They’re not pretty, but they are highly profitable.
Based on this data, which would you
rather buy or make a loan on? Which is more desirable – the five star or the one
star? That’s right, the one-star is often many times more secure and profitable
for both lenders and buyers. So do you see the problem?
Why it’s best just to let the star
system die and never talk about a rating system again.
Clearly, the star system is not working,
nor will it ever work for our industry. I often retort the question “how many
stars is your park?’ with the answer “it has five star cash flow and that’s
all that’s important”. And that pretty much sums it up.
You know, sometimes things just don’t
work out. The 8 track tape quietly disappeared off shelves and now is only
available at garage sales. “New Coke” quietly disappeared out of the grocery
store freezer, and nobody ever talked about it again. So let’s have a moment of
silence for the star system and move on. There are plenty of more important
concepts to worry about – like sales.
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