Editor’s note: This is the first in a series of articles on homebuilders’ willingness to pay commissions to real estate agents who can bring buyers to their properties. Read Part 2, "New homes are one solution to tight inventories."
As the housing recovery picks up steam and new-home sales return to historical levels, will builders stop courting Realtors?
Sales of new single-family homes were up 28.9 percent from a year ago in January, to a seasonally adjusted annual rate of 437,000, according to a recent U.S. Census Bureau report. That’s the best January since 2008, and there’s plenty more room to run — new-home sales exceeded 1 million a year during the last boom.
"It is safe to assume that new homes construction will continue to move forward, if not surge," said David Crowe, chief economist for the National Association of Home Builders, in a February report.
It is also safe to assume that a growing number of homebuilders — but not most — will forget the Realtors who brought them to the dance.
Studies by the National Association of Realtors say that 63 percent of all new homes sold to prospects introduced to the homebuilders by Realtors. According to Builder Homesite Inc., a consortium of 32 of the largest production homebuilder in the United States, 84 percent of all home shoppers contact a Realtor.
Thus, many production homebuilders face an important business decision that affects their sales and relationships with the very Realtors they have worked so hard to nurture.
According to S. Robert August, a lifetime director of the National Association of Home Builders and president of North Star Energies, "We have already started to see the pendulum swing away from total Realtor commissions in Denver. Builders are beginning to eliminate commissions on options and lot premiums."
Is this the direction most homebuilders are heading? Maybe not.
To test this proposition, I conducted the following poll among members of LinkedIn’s New Home Professional Group:
Question: As new homes sales improve, do you think production builders will continue to pay co-broker commissions?
The question drew 62 respondents, mostly those involved with new-home sales. During the 30 days the poll was live, 44 respondents (71 percent) voted "yes." The other 18 (29 percent) voted "no." Some of the 55 comments made by respondents are shared below.
The general feeling was that while some homebuilders will eliminate co-broker commissions altogether, more will eliminate commission for upgrades, or lot premiums, and may tighten the protection period — from, say, 60 days to 30 days.
John Huston, a 15-year sales management executive in the Phoenix, Ariz., area, made a point that’s hard to ignore.
"I suppose one could make the argument that paying a commission reduces the profit; but that presupposes that every co-broker sale would have sold anyway without a broker in the same period of time," Huston said. "That has not been my experience."
Mike Dwight, president at Phydeaux Inc. in Orange County, Calif., said, "If the builder discourages agents, they create their own competition with resales and other builders who encourage agents to refer to them."
It appears that 2013 is going to be the year that new homes become a high-demand inventory choice, especially as resale inventory remains tight.
So homebuilders, who have been profit-starved for years, must either accept the fact that it’s worth offering a consistent commission and co-broker policy to Realtors who introduce ready, willing and able prospects to new homes, or not.
If they are going to cut out real estate brokers, "a builder must assume that his product is so magnificent they no longer need access to the 90 percent of all buyers that typically engage Realtors during their search process," said Tim Wilcox, president of Irvine, Calif.-based Home Builder Media Group.
While history may repeat itself, this time there is no history to repeat. This is the first housing recovery in the history of the world that comes with a marketing booster rocket: the Internet.
What has not changed is the pressure on publicly traded production builders to demonstrate to shareholders that they are growing profits on a quarterly basis. Homebuilders have a limited ability to raise prices based on increasing land and material costs.
I don’t believe it is about "greed," as some do. Homebuilders, like any other business, have a responsibility to their shareholders to maximize profits. It is prudent and professional to recognize the homebuilder’s challenges, and that what they do with their commission policy is a business decision and a business risk.
To their credit, production homebuilders have been "all in" when it comes to working with the Realtor community, and my guess is that many will remain so.
Silda Villaamil, area manager for Lennar Homes in Southeast Florida, said, "We were one of the very few that made a commitment to continue to pay broker commissions during the good times. We always felt that maintaining our broker relations was important, I know that no one regretted that decision."
The counterargument is that the builder can now attract more walk-ins and thus "save" on commissions paid to brokers.
But a large proportion of "walk-in" buyers also have homes to sell and are already working with a Realtor — an issue homebuilders have no solution for. Homebuilders will also be the first to tell you that a large percentage of their walk-in traffic is not financially qualified, or is not actually in the market.
In the old days, street signs drove a large portion of the traffic. Today, there is much less impulse traffic.
Homebuyers have seen the home, the floor plan, prices, features, an aerial of the location, on the Internet, long before they visit the community.
"Tire kickers tend not to want to get involved with a Realtor, and that’s a good thing.
Realtors deal with this market every day. Homebuilders have had a long time to get to know Realtors and evaluate the impact they have on sales.
Marketing commitments to the Realtor community are much deeper than any time in history. It is not a simple thing to dismantle Realtor marketing machines that are generating "first responder" prospects that are converting to buyers.
Production builders are now using their "Internet advisers" to set appointments for Realtor prospects — an unheard-of concept before the Internet. They focus on the prospect, not the Realtor.
Homebuilders are accepting the fact that Realtors control the homebuyers, and are making it easier and faster for Realtors to get their ever-improving on-site teams in front of the Realtor’s prospect.
The fact is Realtors need the inventory. Homebuilders need qualified prospects to assure continued momentum.
Realtors, sharpen your new homes showing skills. Homebuilders, don’t leave your Realtor networks at the dance. After all, they stood by you in the recent past when you couldn’t get a date.