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Are homebuilders burning bridges with real estate agents?

Some homebuilders won’t pay buyer’s agents in a hot housing market. Is that a mistake?

HW-Alanna-Strei
Alanna Strei of eXp Realty in San Diego and Cornerstone Communities’ new San Diego townhouses

Real estate agent Alanna Strei’s client wanted to check out “Tesoro Vista Del Sur,” 134 newly built townhouses in the Ocean View Hills area of San Diego. The three-story abodes were part of an array of newly built properties that homebuilders are creating across Southern California

So Strei, an agent affiliated with eXp who specializes in relocating military personnel, and her potential homebuyer strode into the sales office of Cornerstone Communities, the site’s San Diego-based builder.

“The first thing they said to me was, ‘I’m not paying you,’” Strei said of Cornerstone, who did not return numerous messages left by HousingWire. “They were so rude and off-putting.”

Increasingly, homebuilders like Cornerstone are either not paying real estate agents like Strei a commission or offering a sharply reduced one, according to agents, homebuilder industry insiders and builders themselves.

The reason is simple: demand is through the roof. 

“Do you need an agent when you have 10 buyers for every home?” said Tim Costello, CEO of Bdx Inc. a consortium of 32 different homebuilders. 

Agents don’t want to hear that. At the very least, they want to believe that homebuilders will need them again, eventually. 

“They are burning their bridges,” said Abigail Jennings of Lake Norman Realty in Cornelius, North Carolina. “And this is not going to end well.”

The tricky world of homebuilders and real estate agents 

First, the good news – or at least some perspective – for agents.

Sales of existing homes make up over 85% of the U.S housing market. The Census Bureau reported a seasonally adjusted annualized rate of 5.7 million non-newly built homes in May. And, for those homes, the agent will probably snare a commission.

That’s because about 90% of existing homes sold involve real estate agents, according to a RealTrends study published in 2018. And most of those agents are dues-paying members of the National Association of Realtors. Under NAR policy, the agent listing the home must split their sales commission with the homebuyer’s agent.

But no payment assurances exist for newly built homes, in which agents interact with an in-house sales representative. 

There is a glaring lack of data on how often builders pay buyer’s agents, and what they pay. Groups such as John Burns Real Estate Consulting and ViaSearch said that they are familiar with the ebbs and flows of builder payments to agents, but have no data on the issue. Nor does NAR. The trade group for homebuilders, the National Association of Home Builders, said they were not even familiar with the matter. 

“This isn’t an issue the NAHB monitors,” a trade group spokesperson emailed.

But while builders’ commission payments may be esoteric for some, it’s deeply important for a coterie of real estate agents whose lifeblood is connecting their clients with new homes. 

One of those is Sandy Williams, an agent for eXp in Sarasota, Florida. In her job, Williams handles clients from across the country, looking to move to the Sunshine State, and, in the process, design their own home. Williams establishes ground rules. It’s important, for example, she said, “To let the homebuyer pick out the goodies – the countertop, the cabinet, all the finishing for the house.”

But when the buyer and homebuilder negotiate the price varies. Sometimes it’s before construction, Williams said, allowing the buyer to customize. Other times it’s later in the process. 

Just as timing is imprecise, so too can be homebuilder policies for interacting with agents. Decisions in agent relations are generally not made at the executive level, said Adolfo Ruiz, CEO and senior lending officer at SEFS Home Loans in Longwood, Florida who has dealt with several Florida homebuilders.

“I can tell you who is responsible without a doubt, the regional sales manager,” Ruiz said.

A regional manager of, say, Florida and Georgia, Ruiz said, makes a decision in conjunction with the sales manager of a specific market — for example, the Daytona Beach and Orlando markets. 

“They work together to figure out what they can report making per each unit,” Ruiz said, and the cost of a commission is one line item in that analysis. 

Adding to the fluid nature of commissions is that, “Some builders play the housing cycle, paying less commissions when the market is strong and more commissions when the market is soft,” said John Burns of John Burns Real Estate Consulting. 

“Right now,” Burns added, “The market is hot.”

Good times, bad times

Lumber prices aside, it’s a fantastic time to build. 

Sales of newly built U.S. homes rocketed 20% from May 2019 to this May, per Census Bureau data, with an annualized rate of 769,000 sales. Purchases leaped even though price did too, up 17% to $334,000 in May.

It’s a market that has benefited regional builders like San Diego’s Cornerstone (Despite Strei’s experience Tesoro Vista Del Sur has sold out) and national ones like D.R. Horton, the country’s biggest homebuilder by gross revenue. In the past quarter, D.R. Horton, reported $1.1 billion in net income, a 77% increase from a year earlier.

“Housing market conditions remain very robust, with homebuyer demand exceeding our current capacity to deliver homes across all of our markets,” stated D.R. Horton chairman Donald Horton in prepared remarks this July.

When demand exceeds supply, some homebuilders reassess the worth of an agent. 

“I pay less than the 2.8% to 3% sales commission that was in the past customary,” said Jay Scolnik, managing broker of Premier Community Homes, a homebuilder in Englewood, Colorado. “The information that buyers receive and the reduced amount that a realtor has to do to work a new sale in a new home community, in my opinion, requires a reduced commission.”

Scolnik said that he and his builder brethren can no longer guarantee an agent a certain pay floor.

“I’m not sure there is a customary commission any longer,” he said. 

One national homebuilding company, which requested anonymity, also cited technology on top of the high-demand market as a reason to cut commissions. “You can virtually experience the whole new home before you step foot in it,” the builder representative said.

The request for anonymity was par for the course. HousingWire reached out to two dozen homebuilders for this article. This included multiple messages with each of the top 10 homebuilding companies in the country by gross revenue, as tallied by Builder Magazine.

One of these 10 builders was willing to comment on the record, Greenwood Village, Colorado-based Century Communities

“We don’t disclose our arrangements with brokers and realtors, but highly value our relationships with these agents who are true partners in our communities,” the company said in a prepared statement. 

The lack of replies could indicate the builder’s sensitivity to further upsetting agents. 

“It’s a very touchy subject,” said Costello of the homebuilder’s consortium. “If you bruise the agent relationship, it may be challenging to ramp that engine back up again.” 

Some agents are vowing to remember their bruises. For example, a handful of agents singled out Lennar, the Miami-based builder that has significantly invested in iBuyer Opendoor

“They are probably the worst,” said Williams, the Florida eXp agent.

“I’m going to where people don’t change the rules because the getting is good,” Williams added, speaking of not just Lennar but a local Florida builder. “If you’re going to treat me like crap during the good times, I’m going to remember you.”

Lennar declined to comment. 

The small payback

Perhaps real estate agents like Williams are respectful of rules, because their trade group, NAR, is so thorough with them – from the splitting of a commission between listing and buyer’s agent, to requirements of posting homes listed for sale.

But homebuilders that don’t pay can lead to a conflict between client fiduciary duty and earning a living. “Our members are ethically required to always act in the best interests of their client,” NAR said in a written statement. “They are also entitled to get paid for their services and should have that discussion about commissions with consumers upfront.”

Consequently, real estate agents, despite their thirst for revenge, have a nuanced strategy.  

“I tell all interested buyers about the new builds I’m aware of, and I explain that I cannot represent them if I am not compensated by the builder,” said Strei, the San Diego eXp agent. “But I’m glad to introduce them and do a walk through with them because I love looking at new builds.”

Unclear, then, is whether builders need to worry.

“Since agents are required to do the best service for their clients,” Burns, the real estate consultant, said. “They are supposed to help their client get into the best home for them regardless of how each builder treats them during the strong years of the cycle.”

Burns called the conflict between real estate agents and builders an “age-old debate.” But there are a couple of new wrinkles. 

One is the idea that iBuying, virtual tours, and total consumer access to new home builds will permanently hamstring the worth of an agent in having any particular insight about new home builds. 

“I think the Realtor community is over compensated and that commission will be reduced in the future,” said Skolnik, the Colorado builder’s broker. “I see technology reducing commissions in the future.” 

A second wrinkle is that NAR’s guideline for a commission split between listing and buyers’ agent faces antitrust challenges, and agents may have to improvise to ensure a payday for all types of home deals. 

Gary Mapa, an agent with Site Acquisition Resultants in Sacramento, said that more buyer’s agents he encounters are putting into writing, “That they are obligated to get a fee if the client finds a home.”

Mapa, a real estate agent for 44 years, said he has never resorted to that move. Added the agent, “I always just trust that the buyer is loyal.” 

Comments

  1. Builders, mostly national builders, in my market are essentially leaving buyers without representation. It is not only the reduced commissions, but egregious policies that state if the potential buyer has reached out to the builder on their website or visited any community by that builder, the builder will not pay the buyer’s agent. I have had more difficult transactions with builders whose representatives promise the buyer the moon, and then the buyer finds out the promises were illusory because they were not in writing. The onsite sales representative represents the builder and could care less about the buyer. These builders who are cutting the commissions and relationships with buyers’ agents will change their practices as soon as the market turns, which it will, but they will not be top of mind for realtors. Local builders know that relationships in the industry matter and don’t increase and decrease commissions as market conditions change and tend to have a better product, so they are always top of mind for realtors.

  2. If these realtors bring so much value to their (buying) clients then the client should have no trouble paying for their commission….but when they have to pay $15,000 for a commission on a $500,000 house on top of purchasing the home we know that’s not going to happen. Buyers don’t care about the commission since it is the seller who is covering it, but if they had to pay for it they would question why they are paying so much. With most of the home buying process online now from search, contracts, mortgages etc. Realtors bring a lot less value than they used to. If I’m a home builder with a wait list a mile long to buy my homes at full price I don’t need a buyers agent to bring me clients…..again if the agent is so valuable then client should be happy to pay them the 3%.

    1. Sellers pay the commission but in a sellers market, they are making a lot more money than in the past, and buyers are paying a premium. Have you seen the builder price increases? As much as 75% in some areas where the homes were affordable a year ago. How can we ask a buyer to also pay a commission on top of inflated prices? And where will they get the cash, as it will have to be a cash pay out, not out of the proceeds from the home, which is why sellers pay the commission in the first place.
      The reason it seems unfair is agents & buyers act like its the responsibility of the seller to foot the entire commission, but in reality it should be and normally is considered in the price the buyer is paying for the home, and also often the commission is a negotiable piece when determining the sale price. Not so cut and dry.

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