News & Notes Archive - March 2006
Manufacturers, retailers and contractors: some thoughts about an industry quandary and a possible solution
In last month's News & Notes I wrote about the experiences I had researching and writing the just-published The Grissim Ratings Guide to Manufactured Homes. This month I want to share some thoughts about the way the the industry distributes and sells its homes to you, the home buyer, and the quandary it faces.
Spend a full year interviewing all 83 HUD-code builders in the U.S. and you get a pretty good feel for the culture of this industry, and how it varies from region to region. The same is true of the products. In general builders with the highest construction ratings are found in the northern tier of the U.S. where harsh winter weather mandates strong, higher quality construction. In contrast, below average ratings abound in the Southeast and South Central U.S. where Sun Belt weather is more forgiving of cheaper materials and lower quality construction, and where demographics suggest the need for affordable shelter more frequently trumps the desire for a home that has a site-built appearance and which will hold its value, let alone appreciate.
Similarly, sales centers in regions with more educated, affluent consumers-Pennsylvania, for example (which is second only to Florida in the number of retirees)-are more likely to have robust turn-key sales programs with retailers either working closely with general contractors or having GC licenses themselves. They're quite accustomed to dealing with knowledgeable home buyers. In contrast, many retailers in the deep south serve the needs of manufactured housing's traditional core market: the working poor looking for affordable housing. Historically these home buyers tend to be less educated, less sophisticated and less informed, and the retailers catering to them are more used to a close-the-deal, drop-the-box-and-go approach. They don't often deal with an informed buyer, and the impression I got was they, and the builders whose homes they sell, prefer it that way.
Take, for example, the factory sales manager of a low end southern builder I mentioned in last month's News & Notes: "I don't want you to publish a book that's a weapon against me. I see here where you also have a book on how to find a reputable dealer and how to negotiate a fair price," he continued. "I don't think it's up to you or me to write a book telling home buyers how to negotiate, because that's gonna make the dealer mad with me, contributing to that."
Give the man high marks for voicing an unspoken attitude I sensed with many builders I interviewed: not only do they feel threatened by anyone providing consumers helpful information to protect their interests, they still regard their dealers as their true customers, not you the actual home buyers. Moreover many MH builders harbor an implicit nervousness about their dealers. Call it an institutional tension. I found it intriguing, for it illustrates a quandary in which the industry has long been mired.
The dealer hammer lock
Here's the problem: Secretly, every HUD-code builder wants a wider, more open marketplace in which their homes can be distributed and sold, but they dare not say so publicly for fear of alienating their dealers on whom they depend to keep their production lines going. Moreover, if they lean on their dealers, insisting, for example, on more transparent, ethical sales practices or more professional trouble-free set-ups, the dealers are likely to say "Don't get preachy or pushy. If you do, I'll go to another builder."
Granted, there are builders who have the clout to demand high standards of their dealers without fear of retribution-Skyline comes to mind-but I submit the majority of builders, particularly in the crowded low end marketplace feel quite constrained by this predicament. In short, the quandary is an institutional flaw in the MH business model, and in significant ways it works against the achievement of manufactured housing's great potential.
Is there a way out of this quandary? I believe there is, with two strategies. One is through an increase of partnerships between builders and developers (both private sector and community development/non-profits) to place HUD-code homes in new subdivisions whose customers are families looking for a neighborhood as much as a home. These home buyers, being the least likely to visit a street sales center, do not pose a threat to retailers whose principal customers are those who want a little slice of heaven on a scattered rural parcel or in a land-lease community. Fuqua Homes of Oregon and Patriot Homes are two good examples of thriving developer partnerships.
The second strategy is untried, or at best nascent. Call it dealer-brokered sales for homes that are sold to contractors hired by home shoppers. By way of brief background, U.S. HUD-code builders, with very few exceptions, are required by law to sell their homes only to those who possess a dealer's license. In some states the licensing laws are so rigid one has to have a boulevard street lot to qualify. But in many other states one only needs to show a familiarity with escrow, transaction documentation, customer legal rights, and be fingerprinted and bond-able. In these states, a few general contractors are obtaining HUD-code dealer licenses, taking orders from customers and purchasing the homes right from the factory with either construction loan funding or their customer's check.
Obviously, if this practice were to grow, you can bet the dealerships, being excluded from any participation, would soon cause a great deal of grief to their builders. But, what would happen if, say, the manufacturers offered to sell homes to qualified, certified general contractors provided the dealers brokered the sales. Such a strategy could benefit all parties:
- The dealer, while likely giving up a percentage of normal mark-up on a home sale, would serve as a broker, make a quick transaction and never see the home at all (let alone any transportation, set-up or warranty problems). For any dealer that would be a dream transaction. Fact is, the dealer would likely be willing to give up a meaningful chunk of the margin, making his or her profit on the back end through factory rebates.
- The general contractor would not have to be a licensed MH dealer, yet would have full access to the dealer's marketing resources, especially lot models, to showcase homes to his potential clients. In addition to pocketing a margin on the home sale itself, the GC would profit by providing all the work needed to provide a turn-key home to the customer.
- The manufacturer would benefit by additional orders from an expanded distribution/sales network, in this case qualified general contractors.
Tweaking the business model
California already offers a specialized general contractor's license specifically for manufactured housing. Called a C-47, the license not only allows a GC to do everything associated with a conventional site-built home (e.g., site prep, utilities connections, decks, landscaping, concrete flat work, fencing), it also allows the license holder to perform the work of any and all licensable trades without having to subcontract those services, as long as they're related to the home. In contrast, a general building contractor can directly perform only four licensable trades and must subcontract any additional work in those specialties. With no requirement to hire subs, a C-47 contractor can realize greater profit from a HUD-home project, a fact that has inspired a small number of California GC's to specialize in MH only.
As important, they ensure that their clients get a whole house: skirting, exterior accents, landscape, drive way, garage, fencing-the same as a conventional site-built home. What you have here are the makings of that still mystical entity-the cradle-to-the-grave MH contractor. California-based builder Silvercrest, for example, is already selectively conducting business with a number of C-47 contractors to whom it is willing to provide warranty service.
Ideally, home buyers who hire a C-47 contractor should have reasonable protections to ensure that the chain of product responsibility is honored and that the work is done properly. Without the traditional participation of a dealer who hires the set-up contractor and thus assumes responsibility for the workmanship (and who can lean on the contractor, withholding payment as necessary), customers could find themselves at a disadvantage. But this scenario lends itself to voluntary standardized contracts with consumer protections (Contracting Best Practices?), even the creation of a new participant: inspection and approval companies similar to those one finds in the modular home sector.
What makes dealer-brokered sales direct from the factory to the general contractor attractive (at least on paper) is that all the stakeholders, especially the dealers, participate and all profit without anyone sacrificing their current market reach or having to significantly change their way of doing business. Plus, it's entirely market driven with little or no need for governmental oversight.
The odds for growthful change, whether it be this proposal or any other that may show promise, ultimately depends on the collective character, strength and vision-the very culture itself-of the manufactured home industry. Unfortunately, it seems that glaciers move faster than this industry.