Builders are exploring ways to sell directly to customers without the help of real estate agents, part of the fallout of the recent National Association of Realtors (NAR) lawsuit that changes how commissions are paid.
“This settlement is huge news for the housing market,” says Zonda chief economist Ali Wolf. “Buyers facing higher Realtor fees may realize that buying directly from a home builder might make more sense. In fact, the timing couldn’t be better for home builders as they currently represent 30% of total inventory, up from 10% to 15% historically.”
Builders often pay buying agents a fee as an incentive for bringing buyers to their projects. In a recent LinkedIn post, D.R. Horton said it paid out almost $1 billion in two years to agents. But the NAR settlement may clear the way for builders to deal more directly with buyers, cutting out the buyer’s fee altogether.
Mike Salomon, president of Texas-based builder Sandcastle Homes, says the company is employing a cautious approach but is exploring options that would allow buyers to proceed without paying commissions.
“We are exploring using the approach that, rather than pay commissions to the Realtors, we would give an allowance to the buyer—likely 3%—who can then choose to use or not use a Realtor,” Salomon says. “If they choose to use a Realtor, then they can negotiate the level of service and commission/fee appropriate for their needs.”
In mid-March, the NAR announced an agreement to end litigation of claims brought on behalf of home sellers related to broker commissions. The NAR continues to “deny any wrongdoing” in connection with the Multiple Listing Service (MLS) cooperative compensation model rule but agreed to pay $418 million over four years and agreed to place a new MLS rule prohibiting offers of broker compensation.
As part of the new rule, offers of broker compensation could not be communicated via the MLS, but they could continue to be an option for consumers “off-MLS” through negotiation and consultation with real estate professionals.
For Tom Nelson, founder of Zonda-owned UTour, the most significant impact of the NAR settlement as it relates to the new-home market is the anticipated changes that will center around the compensation of buyers’ agents.
“The commission for buyers’ agents represents a substantial external cost for builders,” says Nelson. “With the responsibility for agent compensation shifting away from sellers, builders could save millions of dollars annually. These savings can be reinvested into different aspects of their business and enhance their profitability.”
Nelson says the changes on the compensation of buyers’ agents also presents “a considerable advantage” for home buyers.
“Studies confirm that home buyers prefer new-home construction but often assume they cannot afford it,” Nelson says. “The policy changes would allow buyers the option to negotiate their agent’s compensation should they opt for representation. This scenario affords builders the chance for closer engagement with potential buyers.”
Nelson says the direct interaction between builders and potential buyers “is crucial” for educating buyers on the advantages of new construction.
“[The advantages] include addressing affordability through rate buydowns, decreased energy costs via energy-efficient construction, home warranties, and more,” Nelson says.
In addition, as part of the settlement, NAR has agreed to a new rule that would require MLS participants working with buyers to enter into written agreements.
“I think there are some wins here [related to] clarity. When you have a prospect reach out to you and you say, ‘Do you have a buyer agency agreement? Yes or no.’ It’s black and white now,” says Kevin Oakley, managing partner of Do You Convert, an online sales and marketing partner for builders. “I think this is going to provide clarity for builders and [become] standard operating procedures [indicating] that we’re going to be able to move forward.”
While Oakley says “the potential for unintended consequences and plot twists” are high, one result of the settlement is likely that agents who sell only two or three homes a year “are probably going to go away.”
“I think those folks are going to have a really hard time justifying why in advance they’re worth the amount of money that they want to negotiate for their fee,” Oakley says.
While all the changes from the settlement will not go into effect until July, the news generated a flurry of reaction from all corners of the housing industry, forecasting potential impacts or changes in business practices. For builders, many are taking a “wait and see approach,” given the changes from the settlement do not take effect until the summer months.
Marla Telfair, corporate director of sales at Drees Homes, says with the settlement a likely trend is that buyers will go directly to list agents without representation from a buyer’s agent.
“For builders who continue to pay buyers’ agents, they can expect to see an uptick in Realtor traffic,” Telfair says.
In addition to changes in practices, during a webinar discussing the ramifications of the NAR settlement, Zonda chief advisory officer Tim Sullivan shared the importance of reviewing data capture platforms and systems to ensure home builders have transparency in their initial engagement with consumers.
According to Sullivan, disciplined data systems and processes can do more to lower broker co-op payments than nearly any other approach. Additionally, builders may consider offering a preferred broker program for those who drive volume to the company and may consider incorporating a rewards program to work with large volume partners.
“The opportunity for builders is very significant. There’s [the opportunity to] increase the relationship with the buyer, there is [the opportunity for] building more trust in the consumer experience, and there’s opportunity for an element of financial flexibility for the buyer,” he said during the webinar.
