Let's Give up on the Star System
Article
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.