Monday, July 17, 2017

A Modular Statistic We Hide

For years after the housing recession of 2008 the modular home building industry was stagnant. Then homebuilding began an upturn and houses once again began flowing off the production lines at factories across the US.

Economists, city planners, housing experts, Architects and the media began telling everyone that modular and prefab was the future of not only homebuilding but hotels, hospitals, affordable housing, ADU’s, highrise apartments and even housing for the homeless.

Many wood based modular factories added commercial structures to their lineup and projects started sprouting up all across the US. Marriott Hotels discovered the cost and time savings of modular. Hospitals and assisted living facilities are now following their lead. Hundreds of projects are on the books for modular factories.

Modular hasn’t been this strong in quite some time. Of course there are those pesky problems that keep popping up like the skilled labor shortage, transportation restrictions and over zealous code officials but all things considered, it ain’t too bad!

However, there is one part of our industry that gets almost no attention and will not see any improvement in the near future and that is the “New to Modular” home builder.

I did a very stealth survey over the past couple of years asking factories from North to South, East to West and all points in between how many new builders they brought into their company and if they had a training program.

The results make me wonder if there will be a modular home builder anywhere in the country in 20 years.

I found only two factories that offer any training program when a builder joins them and not one that has an active “New to Modular” acquisition program. Let me make this clear. Having an advertisement asking a builder to visit your factory is NOT a recruitment program. Acquiring a builder from a competitor doesn’t count as an acquisition, it simply moves the same number of new homes around to another factory.

Asking factories how many ‘new’ builders they brought in over the past two years yielded about 4 per factory with most factories telling me that none of them are buying today. Zero for Four! Not a good statistic. Not at all!

Some factory owners told me they do not accept “New to Modular” builders simply because of that statistic and that don’t want to invest in a training program. They prefer to ‘acquire’ builders from their competitors.

A couple of factories have a training program but it revolves around how to work with the factory and who the builder should be talking with about different parts of the project. Very little or no training on how to become a successful modular home builder.

Since 2014 there have probably been less than 10 successful “New to Modular” builders joining the ranks of modular builders across the entire US. NOTE: a manufactured home dealer taking on modular homes does not count as a new builder and neither does a developer filling a community with homes or townhouses as they usually hire Project Managers familiar with modular construction.

Why aren’t people looking to become modular home builders? It’s not like becoming a site builder where you should work your way up the ladder before building your first home for a customer. No, an executive let go from a big corporation with a nice severance package really only has to know the fundamentals of construction to become successful as a modular home builder. 80% of the work is done by the modular home factory, the delivery and set crew, the excavation and foundation people and all that is left is the finish work which can be easily subbed out.

That executive probably knows marketing and possibly sales and I’m sure has taken accounting courses in college and might have had many people working under them at their last job. They know how to take charge. They like structure.

Lots of these recently laid off executives with big severance packages look to franchising to meet their needs for structure and training, neither of which is available in the modular housing industry.

Please don’t get me wrong. America’s modular housing industry is great. We produce some of the most energy and cost efficient modular homes in the world. Our degree of customization is unmatched anywhere. Our production workers are the best. Our factories are working at or near capacity trying to keep up with the new demands from the commercial side of our industry.

Our only downfall is a lack of acquisition and training to attract “New to Modular” people that don’t even know we exist when they begin looking at either changing careers or moving out of ‘site building”.  

Now let us take a look at Jim and Jane Smith, a young couple where one of them was laid off from their corporate job and they decided to look at franchising a Dairy Queen in their town. After inquiring and learning that a Berkshire Hathaway’s Dairy Queen (same people that own Clayton Homes) was appropriate for the town, they decided to jump in.

Neither of them had ever worked in a fast food or any type of service business so this would be a totally new experience.

The first thing they learned was the franchise fee for a Dairy Queen restaurant is $25,000 to $35,000. The total estimated investment ranges from $382,000 to $1.8 million, with liquid cash available of $400,000. A 4-5% royalty fee on gross monthly receipts is paid to the company.

The next part required Jim and Jane to go through an extensive training program.

There are currently four required components to initial training:
  1. The Management Training Readiness Assessment (MTRA)
  2. SERVSAFE certification
  3. The American Dairy Queen Corporation’s training program (three phases): Phase 1, Product and Equipment Training; Phase 2, Systems & Management Training; Phase 3, People, PRIDE and Profit Training.
  4. A cake decorating and certification course
The franchise’s designated manager and two assistant managers are required attendees for the first 3 components. Only one person is required to attend a cake decorating certification course. Prior to attending the franchiser's training program, the required attendees must pass the MTRA, which is administered at a location designated by the franchiser. The MTRA measures leadership, customer service, decision-making, prioritizing and business math, and may be modified by the franchiser at any time. The franchise’s controlling owner (as defined in the franchise agreement) must, at the franchisee’s expense, attend all meetings the franchiser holds or sponsors in their area or region including all DMA or other marketing area meetings, and all meetings relating to new products or product preparation procedures, new DQ system programs, new operational procedures or programs, training, restaurant management, financial management, sales or sales promotion, or similar topics.

Here are the required expenses before the doors are opened for the first time:
  • Initial franchise Fee $35,000-$35,000
  • ALTA Survey $0-$5,000
  • Initial Training Fees and Costs $1,125-$11,825
  • Travel And Living Expenses for Training Programs $23,000-$38,500
  • Building Construction and Leasehold Improvements $550,000-$900,000
  • Construction Consultation Services $0-$7,500
  • Building Plans, Design Intent Plans and Architectural Seal $15,000-$45,000
  • Equipment (Including Signs and Point-of-Sale Systems) $390,000-$530,000
  • Training Inventory $5,000-$15,700
  • Opening Inventory $8,300-$38,900
  • Utility Deposits, Business Licenses and Government Charges $4,000-$17,000
  • Attorney's Fees $1,000-$8,000
  • Additional Funds (3 Months) $51,000-$198,000

ESTIMATED TOTAL $1,083,525-$1,850,425

But Here Is The Bottom Line:

The average Dairy Queen Franchisee makes $70,000 a year!

Now let’s look at what Jim and Jane could have made if they had chosen to go with a modular home factory that offered a training program.

The average small builder makes $86,000 a year.

Even if a factory charged Jim and Jane a whopping $50,000 for training and assistance on marketing, selling and building their first modular home, they would have made an average of $16,000 more without all the hassle, fees and red tape of being a Franchisee of a major company like Dairy Queen, 7-11, Taco Bell or Jiify Lube.

Why doesn’t this happen in our industry?

Share your thoughts either pro or con.


Anonymous said...

Coach, the modular industry has survived without any type of training for years and years. It isn't about to change just because you write about it. I remember listening to Jerry Rouleau a few years ago talking about selling more houses. No mention of how to build them.

This is not a statistic we try to hide. We have never measured it so why start now.

Thanks for nothing Coach.

Josh Margulies said...

Anon this is not true. There has been training and it can be very useful. But who will invest in such a thing if the builder is not committed to the manufacturer and vise versa. Time was a good factory would offer some training or seminars for prospective builders and retail customers as well. However given how dispersed we have become I think training and standards are something that should be written and published. Someone needs to write the book. It should be the mhba.

Tom Hardiman said...

I'd disagree with Anonymous that there is no type of training (no surprise - hey is there just one anon poster on here or a whole bunch of them?)

MHBA does offer a lot of training on various aspects of the business including marketing, regulations, economic data, etc. But if we are talking about "HOW TO build a modular home" I think that has to come from the manufacturers for liability and warranty purposes. Yes? No?

Coach said...

Tom, you're right, the MHBA offers many opportunities to not only learn many aspects of marketing and regulations, it is a great place for peer to peer interaction that builds a better industry.

My point is that too often a builder will try going modular only to lose money on the first one or two because nobody has explained the basics of modular construction to him or her. Building a modular home requires different skill sets from building a site built home and nobody is teaching them.

I think it is a big undertaking for the MHBA to be responsible for that phase of modular construction as Josh wants. No, it will take one factory to take up the mantle and prove that teaching the fundamentals pays dividends before other factories join in.

Shawn Corkrean said...

You have touched on the dirty secret of the industry. Manufacturers don't provide builder training because most don't really understand what a builder actually does. It is what keeps this industry from becoming vertically integrated as well as generally restricting growth. In your Dairy Queen example, the franchisor teaches the franchisee how to run the entire business. At best, a factory teaches a builder how to order a house, a few technical details, and how to do some sales/marketing.

Even if manufacturers had the ability to train builders, there is a certain level of disincentive because there is always a valid, lingering concern that the builder will take the training and turn it against the manufacturer by buying from another factory.

I just joined the MHBA and don't know too much about it, but it would seem like the MHBA is the perfect entity to provide builder training. The MHBA could be a neutral turf that has industry wide support. The MHBA could then be the source of the one thing this this industry desperately needs more than anything else: new builders.

Bill Hart said...

The mods, prefab, timberframe et al industries.. both mfgr-supplier and retail builder-dealer did work basically as a franchiser- franchisee relationship not too may years ago..that is til everyone on both sides of the equation got greedy, the factory initially gave exclusive territories but then..cleaver right.. doubled back simply by using multi product names allegedly built out of a second building on same factory site..maybe..thus loading up several "exclusive" dealers in the same geography.some would authorize two-- three "franchisee within an area that could maybe support one reasonably...then of course the builder-dealers broke rank and started to buy from the numerous factories and the cycle evolved to what you have today.. long term again and restore some integrity..maybe good tough down cycle would have a positive effect..then you must develop real factory field new business development pros get out among em call on banks, nahb xo s, a smal new car dealer maybe and be pro active some planning guys as to how you want it to work two years from now..and then pray some..

Brian K. Willis, P.E. said...

I believe Massachusetts still requires manufacturers to certify their builders know how to install their product. You can't do that without training the builder.

Jake H Lewis said...

Jake H. Lewis - as in most independent business owners prideful minds , I hooked up with Oak Creek Homes out of Ft. Worth , Tx. and with a little help from my friends and the factory rep. I became a modular home builder being self taught with hours of in home / computer study I learned " it cost you money to learn " and it did. Today I am starting to market pocket neighborhood ideas to get more volume to urban land developers. With the help of a factory VP which took to me , he has taught me how to be a good modular builder/marketer . It takes all three ; the factory, the builder and the national organization to make it .