Meritage Homes is shaking things up with its first significant strategy shift in eight years, and working more closely with Realtors is at the heart of its plan.

CEO Phillippe Lord says deepening relationships with Realtors is the largest shift for the builder's evolution. It comes just as the National Association of Realtors (NAR) changes its rules to accommodate antitrust regulations, making it easier for buyers to choose their representation and the prices they pay Realtors for their help.

"We view the home buyer as the Realtor’s customer and the Realtor as our customer, as most potential home buyers have engaged with a Realtor before they ever connect with us,” Lord tells BUILDER.

“We know and embrace that Realtors are a trusted resource for potential customers, particularly first-time buyers. We are leaning into our Realtor relationship and can see a scenario where we are close to 100% co-broker participation, paying local market-rate commissions.”

Lord says the home builder offers marketing and partnership benefits to key Realtor partners, including pocket listings, referrals, and open house opportunities.

“We are still exploring what benefits are most meaningful to the third-party Realtor, but we are seeing strong early success with initiatives that increase long-term volume for these partners,” Lord says.

Meritage Homes is not the only builder to try and reassure agents that life is good in the new-home market. Shortly after the NAR settlement was announced, D.R. Horton said it would continue to work closely with Realtors, as it had prior to the settlement.

“We think this is going to take some time to play out,” the builder said in April. “We work very closely with the brokerage community and will continue to do so regardless of what direction this takes. I think you are going to see some restructuring in terms of commissions, and it will have some impact on the number of Realtors who stay active through the market.”

The class-action lawsuit was filed in Missouri by a group of home sellers who sold properties between April 29, 2015, and June 30, 2022, against NAR, Anywhere, Berkshire Hathaway HomeServices, Keller Williams, and RE/MAX. The plaintiffs claimed real estate commission rates were too high and that NAR’s cooperative compensation rule caused the sellers to pay too much in commissions.

As part of the settlement, Anywhere and RE/MAX agreed to pay $138.5 million collectively. Keller Williams agreed to pay $70 million into settlement funds to be distributed to qualifying settlement class members.

Other Initiatives

During its second-quarter earnings call, Meritage Homes shared the latest evolution of its business model, which is built on two other core tenets: a 60-day closing guarantee and the concept of move-in-ready homes.

Lord says Meritage has grown substantially since the company’s last major strategy shift in 2016 when it migrated away from second move-up homes to its entry-level and first move-up model. The 2016 shift, which also included a 100% entry-level spec building strategy, enabled Meritage to gain significant market share and become a top five national builder.

“We are positioned to grow our business and expand beyond our current state, which is where the refined strategy emerges,” he says. “The goal of our new strategy is to focus our selling efforts on the largest pool of potential home buyers, which means effectively competing with the resale market.”

Competing With Resale Homes

The first step in crafting a strategy to allow Meritage Homes to compete with resale homes was identifying what causes buyers to purchase something used instead of new when location and price are not primary factors.

For new homes, Lord says some general customer objections include that homes aren’t ready on a timeline customers want and that a new build requires a customization process after moving, which ends up being more costly than anticipated.

“We believe that if we can level-set the objections we typically hear in the new-home space, customers will instinctively choose new versus used, as they do for other large-ticket items like cars and appliances,” he says.

By focusing on product and process, Lord says Meritage Homes is able to remove the common customer objections to new homes. It will continue to build the same affordable entry-level and first move-up homes but will take them to a near-completion stage before releasing them for sale to approximate the just-in-time inventory structure that exists in the resale market.

Lord says the home builder will continue to have a four- to six-month inventory supply at each of its communities, but the company will be disciplined in waiting until later in the construction cycle to release homes for sale.

“We believe that the ongoing market conditions stemming from the increasing need for housing from millennials, Gen Z, and the move-down baby boomers combined with the undersupply of existing homes in the market will continue to prove beneficial to home builders in the near future,” he adds. “Although today’s market environment favors builders, our new strategy will allow us to compete against resale homes when the balance of existing homes for sale returns to historical average levels.”

Closing Guarantee

The Meritage 60-day closing guarantee will mean its homes will be ready to close on the same timeline as resale homes, eliminating one of the most common differences between the new- and existing-home markets. To double down on the guarantee, Lord says the home builder will cover customers’ out-of-pocket costs if there are delays in meeting the 60-day closing guarantee.

“The second [core tenet] is move-in ready homes. The concept of a move-in ready home refers to our homes being turnkey—livable and usable from day one,” Lord says.

“Our new homeowners just need to move their furniture and belongings in, because we’ve included the extra items that usually require a material cash outlay in the new-home space, such as ceiling fans, blinds, landscaping, and appliances like [a] washer/dryer and refrigerator. This is a financial peace-of-mind solution that neutralizes a concern when considering a new-home purchase.”

Metrics of Success

Lord says after the market normalizes and existing-home inventory for sale returns to historical averages, Meritage Homes will be able to continue gaining market share and maintain its average four net sales per month sales pace.

“The scale and leverage we have achieved as a 15,000-unit home builder today combined with our new strategy will help us continue growing as we look to become a 20,000-unit home builder in three to four years,” he says.

Beyond the financial measures of success, Lord notes a key metric for Meritage Homes will be customer satisfaction.

“Particularly as we compete with the existing-home market, we look forward to showing buyers the value of a move-in ready home complete with a 60-day closing guarantee,” he says.

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