By Lois M. Baron. Last fall, consultant S. Robert August spoke to more than a hundred builders at industry events. "At each one, I asked, 'How many of you follow up with current or previous customers to ask for referrals?' Nobody raised his hand. Nobody at all."

To industry experts who understand the immense power of the referral--including August, who heads Denver-based S. Robert August & Co.--this response is disheartening. They wonder why builders haven't learned that a sales referral program costs relatively little and has the power to pump up sales--possibly more than any advertising vehicle. Best of all, it's just so simple: All builders have to do is ask.

Here are the five keys to unleash the power of sales referrals in your company:

1. Don't ask unless you're good

Roger Fiehn, a Houston-based consultant, claims that builders should get 20 percent to 25 percent of their business from referrals. If they count Realtor referrals, sales from referrals could represent 75 percent to 80 percent of a builder's total sales.

With stats like that, why aren't more builders doing it? Some say it's because builders don't know if their customers would refer a friend or family member to them because they're not sure how solid their customer satisfaction ratings are.

Builder Jean Neumann agrees: "You don't want to ask for referrals if you're not taking care of customers." Neumann, chief marketing officer of suburban Chicago-based Neumann Homes, says the company's referral percentages hover in the high 20s to 30s in its existing communities and at about 10 percent in its new communities. The company builds approximately 1,100 homes a year, two-thirds of which are entry level.

Photo: Oliver Burston

August points out that many builders are afraid to keep in touch with buyers within the first year because it opens the door for additional warranty service. "If you did the job correctly," he says, "you should never be afraid to go back to the customer from day one and ask the customer for referrals."

"Any marketing effort to generate referral sales will fail if not supported by a builder with integrity," adds Angela Colston, marketing director of TK Constructors in Muncie, Ind. "For instance, on average, our homes appraise for $13,000 more than our customers pay for them. This 'instant equity' position in which we place our buyers gives them a tremendous reason to sing our praises. We also boast a 97 percent on-time completion rate," she notes. TK builds about 435 homes a year and reports that one of every two homes are sold from referrals.

2. Keep it simple

Builders that track referral rates and customer satisfaction see a high correlation between customer service and referral rates. But to be effective, sales referral programs must be simple and respond to the market.

When Neumann Homes saw the great response it could get by asking for referrals, it began tracking referrals but kept the process simple. "As our directors of sales and marketing meet with our sales managers, they ask, 'How many referrals did you ask for this week?'" Neumann says.

Once the referrals come in, builders need to plug them into a system.

Simple Solutions
If you aren't in the market for an expensive custom sales tracking system, these three off-the-shelf workhorses may be all you need:
Goldmine Business Contact Manager by FrontRange Solutions.
ACT! v. 6.0 by Interact Commerce Corp.
On-Line Agent by RealtyStar.

Consultants say any system that retail establishments use to track client information will do the job. August says off-the-shelf software is available in the $200 range, although more sophisticated software can cost tens of thousands of dollars (see "Simple Solutions," right). As with any automated system, whether it be inexpensive or highly customized, it will only be as good as the data entered into it, so keeping it user friendly should be an A-list requirement.

3. Ask as you go

Buddy Goodwin, a regional general manager for Los Angeles-based KB Home, outlines the approach his salespeople take: "When we write the sale, the [buyers] are excited; it's a time we ask for a referral. Then, once we get the loan approved, we go back and ask them for a referral: 'Congratulations, your loan's approved, we're going to start your house. I know we asked you earlier, but is there anybody ... .'"

"Then, before we build the house, we'll meet with our construction person and go over all the plans," Goodwin continues. "Again we'll ask, 'Oh, by the way, do you know anybody who's interested?'"

KB Home hits buyers once again at its "drywall meeting"--a walk-through with the buyer between framing and when the sheetrock goes up to make sure the options and upgrades are exactly right. "These are different people in our company who are asking, so there's kind of a theme that goes through," Goodwin explains.

As KB sees it, builders need to use every opportunity to ask for referrals. "Any time we do something we consider going above and beyond, we try to go back to the buyer and jog his memory. There's a lot of people [the buyer] knows, and we can do a lot of business from that."

Each of KB's regions develops its own sales referral programs. Goodwin oversees the markets in the Florida cities of Jacksonville, Orlando, and Tampa, as well as Houston and maintains a referral percentage in the low 20s.

Delcor Homes in the Detroit area asks for referrals every step of the way, too: upon sale, at the first walk-through, at the pre-closing walk-through, and at closing. President Phil McCafferty says that at each stage, salespeople fill out a form indicating whether there are referrals. Delcor builds about 200 first- and second-time, move-up homes a year and nets a 14 percent referral rate.

Photo: Oliver Burston

Doug Stempowski, vice president of sales and marketing for the Southwest region of Dallas-based mega-builder Centex, claims his region has the highest rate of referrals in the company (12 percent to 13 percent) because "nothing happens without us asking for a referral. We ask at closing and again nine months later how likely a home buyer would be to refer someone to us. When the answer is 'extremely likely,' or 'very likely,' there's no reason a salesperson should have any misgivings about asking for a referral."

Fiehn, who heads Roger Fiehn & Associates, approves of the diligence of these builders and adds a suggestion for how to handle people reluctant to sic marketers on their friends: "At every stage of contact with the buyer, ask: 'Do you happen to know anyone who might be interested in purchasing in your new neighborhood? I promise not to bug them, but I will send them a package of information so they can understand what a great community you have chosen to live in.'"

4. Offer rewards

Make heroes of in-house noncommissioned staff who turn in referrals that go to closing. Announce it over the PA at the office. Put it in the news-letter. And do things like awarding a $250 travel voucher for each referral.

Ideas abound for encouraging salespeople to ask for those referrals. At Centex's Southwestern region's annual meeting, for each verified referral sale, a salesperson gets to spin a money wheel. The wheel is marked in amounts from $50 to $500. "We've had people make as many as 30 spins," Stempowski says.

Giving incentives to tradespeople and vendors is a gray area for most state real estate commissions, so check out your state laws before putting a program in place. (Many states prohibit cash rewards to nonlicensed entities or limit the value of what may be given.) As with any other referral, always call to thank the referring person, and highlight the success in the company newsletter.

Fiehn also suggests awarding tradespeople or vendors a $100 U.S. savings bond, which costs $50. "Fifty dollars generally falls under the radar of the real estate commission," he says. And while they're holding on to the bond until it matures to $100, they'll remember who gave it to them.

5. Play fair

When it comes to Realtor relations, August notes that it's not a problem if builders go directly to their client base for referrals. But Realtors don't want to see builders offering a commission to anyone who comes in and gives them a referral.

"If you offend a Realtor, you're never going to get his/her participation," Fiehn says, and Realtors control the bulk of the noncontingent, qualified buyers in the market.

A good rule of thumb for compensating Realtors is to pay half of the commission they would get for a resale home. "If you pay less, they will not embrace you," Fiehn says. "If you pay more, you're wasting your money."

Communicate clearly what Realtors need to do to earn that commission. And just as with trades and vendors, celebrate every time they bring in a contract and go to closing.

Builders can hold a quarterly event for Realtors who have effected closings, and a year-long contest can reward the top-volume agent with something special, personalized to that agent, like a cruise to Europe or a full-length coat.

On top of commissions, Drees Homes sends any Realtor who sells two Drees single-family homes or townhomes on a cruise. The brokers' office managers can also earn a spot on board.

"This has been very successful for us," says Chris Shaffer, director of relocation for Drees. It has boosted sales and given the company greater access to Realtors.

Lois Baron is a freelance writer based in Arlington, Va.

Get Personal

The gifts that keep giving. Once you've decided to put a referral system in place, don't forget to set up a reward system for buyers who refer friends and family. Here are some tips from the experts:

  • Hit them twice. Home building consultant Roger Fiehn suggests a two-stage program. When the referred buyer goes to contract, the referring party receives a dinner certificate for two. Then, when the buyer closes, the builder leaves it to the sales rep to choose a gift that reflects the tastes of the referring party. "It needs to be something of lasting value," says Fiehn. "Maybe an antique clock, if the people are into clocks, or $100 or $300 worth of a golfer's favorite balls, personalized with his name. Or a gift certificate for art supplies for an artist."

  • Avoid floating fish. Don't give live gifts, such as plants or pets. "It can kill your business," Fiehn says.

  • Be circumspect about services that might lead to warranty issues. A builder doesn't want to give an incentive--such as replacing carpet--that might turn into having to repair damages caused by another company.

  • Go for something easy. Consultant S. Robert August suggests tackling things like light fixtures, appliances, or an attic fan. He adds a caveat: "If your marketplace is one where you feel you got the biggest bang for your buck [by doing something complicated, like replacing fixtures in the master bathroom], then go ahead and do it."

  • Use gift certificates. The Cincinnati office of the Drees Co. has the homeowner select a $250 gift certificate from The Home Depot, a landscaper, a local mall, or a local group of restaurants.

  • Go green. Landscaping can be an effective choice. August suggests that builders arrange with a landscaping service to buy the gift certificate for less than face value. "It's a win-win-win," he says. The landscaper gets business, the builder enhances the community, and the homeowner is happy.

  • Put money back in their pocket. Help a referring customer refinance his home by arranging with a mortgage company to pick up half a point of the origination fee or by offering a certificate for upgrades when the homeowner buys a new home from the same company.

  • "Sidestep" the law. When state laws make direct cash remuneration illegal or limit gifts, builders can show their appreciation in other ways. "With some referrals, we give $500 to the homeowners association's party fund in the referring party's name," says Doug Stempowski, vice president of sales and marketing for Centex's Southwest region.

    Referral Review

    The biggest blunder builders make with a sales referral program is not having one, says consultant Roger Fiehn. "You've got to ask your customers, the Realtor, your trades, your vendors, your employees," he says. "Ask for referrals, and if you ask consistently, you will get the referrals you deserve."

    To get started, review this sales referrals checklist:

  • Ask for referrals at every stage of the home-buying process.

  • Make sure the activities are legal. Many state real estate commissions limit the value of gifts builders can give nonlicensed people.

  • Don't promote incentives to buyers; handle them discreetly and divulge only after the referred sale has closed.

  • Gear the incentives to the wants and needs of the referring party.

  • Personalize incentives whenever possible.

  • Keep in touch with buyers regularly after the house closes, at least quarterly. The contact may simply be a newsletter with news about the company.

  • Treat Realtors fairly and consistently.

  • Consider internal staff as an extension of your sales staff.

  • Offer incentives to tradespeople and vendors.

  • Consider what other members of the community can be tapped for referrals: bankers, trust fund lawyers, rabbis and ministers, for example.

  • Plug referrals into a tracking system, manual or otherwise.

  • Follow up on every referral, and keep those who make referrals up-to-date about how those contacts are going.