In this article we will consider 8 reasons why group homes fail, hoping to set for success those real estate investors who want to pursue this path.
What Are Group Homes?
Group homes are small, residential facilities built according to the community-based model to support severely ill children or adults. These homes usually have a maximum of six or fewer occupants and are staffed by trained caregivers 24 hours a day. There are different categories of group homes. These offer a full or part-time residence, treatment, and resources according to their specialization and purpose. For instance, some group homes offer in-house treatment facilities for their residents.
Group homes may be designed for
- children or adults with learning disabilities or with hampered mobility,
- those with drug abuse and other health care issues,
- people recovering from mental or physical trauma.
Some group homes also offer foster care and family support for children needing special counseling, rehabilitation, or care.
Group homes are usually preferred for the 24/7 support and home-like setting. In addition, group homes provide more focused support since they can take on a maximum of 6 residents only with a set number of trained and qualified staff.
There is no doubt that group homes are one of the more profitable business propositions in the human health facilities industry, and those supporting mentally disabled people are especially effective. This is partially due to the fact that people with intellectual disabilities are long-term tenants relative to group homes that support the mental health population. But, if having read this far, you are wondering why group homes fail despite such an attractive value proposition, you are on the right track as the whole situation isn’t as simple as it may seem.
Before we get to the reasons why group homes fail, let’s consider how they are regulated as this directly affects some of the key challenges group home owners face.
Group homes are regulated by the Department of Health and Human Services, which focuses on providing value and consumer-driven care is the priority for the administrative and departmental programs.
The Health and Human Services makes efforts to introduce reforms in Medicare and Medicaid to improve the efficiency, efficacy, and affordability of treatment. Such efforts present a number of organizational and system quality challenges, apart from prospects for improved patient outcomes, reduced costs, and increased accountability.
8 Major Challenges & Reasons Why Group Homes Fail
Now let’s consider 8 major challenges that can all be reasons why group homes fail despite their owner’s best efforts. Keep in mind that it is very rare that the failure happens as a result of a single one of them. Most often, it’s a combination of several of these factors that makes a group home fail.
Delays in getting tenants
One of the most complicated aspects of the group home business industry is securing the first customer. In most states, new providers are granted a year’s period to get their first customers. If they are unable to find a tenant within the period, their license will be revoked. Bear in mind that during this time, group home businesses, like all other commercial ventures still have mortgages and utilities to pay while waiting to get a tenant.
Competition from existing established agencies can make it hard for new entrants to break through and get new tenants. Health care case managers get comfortable with an existing provider and don’t want to make the effort for adding on new providers that can offer good services as well.
Another important reason why group homes fail is trying to grow too rapidly in order to create profits. Many providers will complete their first group home and look immediately to open another home. This can be challenging if there are no tenants or resources available for the second home. The income generated from the first home can be eaten up by a less than full capacity second building.
Poor Service Quality
Group Home operators that expand too quickly or start multiple group homes at once can fail due to having too many facets to manage. Similarly, operators that try to cut corners by keeping minimal staff can be faced with high incident rates which can affect both rating and long-term tenant retention, which is a sure recipe for a group home failure.
Become stagnant is also a key reason why group homes fail. When providers initially open up a group home, they provide excellent quality of service for the initial few years in order to build up a market reputation. Once established, service quality starts to decline and in case of a high number of complaints, the families start taking out their loved ones from the homes.
Unfavorable changes in regulations
New regulations by the regulators can impact the operations of a group home. Changes in the billing policies for residents as well as increasing payroll rates and policies can affect profitability. While some states use systematic assessment guides like the Support Intensity Scale (SIS) which determines the funding that a person receives. As per such scales, the more independent and functioning a person is, the lower their eligibility would be for a support amount.
Unexpected or high tenant turnover
What can be a surer reason for a group home to fail than not having tenants?
Group home tenants leave for varied reasons. At times families decide to move their loved ones due to home provider dissatisfaction. At times the resident requires more complex care that the current home is not capable of providing. In some cases, residents pass away or move to other facilities to be nearer to their families. Whatever the reason, the loss of a resident is an approximate loss of $100,000 in revenue. This is a huge amount, particularly for small scale providers, who do not have a lot of funds to fall back on.
Violations and negative publicity
A crucial challenge for group home operators is major violations of policy. If these violations become public, the result can be crippling for the group home operator. In case the violation is affecting the health and safety of tenants, the Department of Health and Human Services can cancel or suspend licenses, order tenants to be shifted to other places until the violations are rectified. It usually happens that once tenants are shifted to other homes, they do not want to return to their former homes and at times the family prefers to keep them in the newer homes without the risks of violations.
Getting good workers
Last but not least (and it can even be primary), the quality of workers who help the group home tenants can make all the difference between failure and success. The nature of group homes is such that it is completely dependent on the level of service and care that the staff are able to provide for their tenants. If there is a challenge in getting or retaining good employees, the group home quality would suffer, eventually resulting in a failure.
We hope that our summary of why group homes fail will help you decide whether you want to pursue this path of real estate investing.
While owning and managing a group home can profitable, it is a challenging proposition that requires a mindset that goes beyond mere money-making. If you are not driven by the desire to improve the lives of those who are struggling due to a mental, physical, or psychological handicap, you could be better off seeking other avenues of profit. But if the prospect of making a positive impact on some of the most vulnerable groups of population appeals to you, running a successful group home or two could be a true highlight of your career as a real estate investor.