Who'll Be First Movers Among Homebuilders In New Commission Regime?
We've arrived. It's the Day After.
On August 17, 2024, new rules for how homebuyer and seller representatives earn commissions went live.
In the wake of the National Association of Realtors (NAR) settlement, the real estate landscape has entered a period of unprecedented change. The decoupling of buyer and seller agent commissions, removing these commissions from MLS listings, and the evolving regulatory environment have created a "Wild West" scenario, leaving many homebuilding marketing and sales professionals uncertain and cautious.Homebuilding organizations'e stakes are exceptionally high, as they navigate these changes while already grappling with a challenging market characterized by high prices, high interest rates, and slowing sales.
Immediate Impact
The NAR settlement represents one of the most significant shifts in the real estate industry in decades. The traditional model, where sellers covered the commissions for both their agents and the buyers' agents, has been upended. Now, buyers are increasingly responsible for negotiating and paying their agents' fees directly, fundamentally altering the dynamics of home sales.
Industry Confusion: As highlighted in recent articles from the New York Times, the transition has been anything but smooth. Buyers are confused about their new financial responsibilities, and even seasoned agents are struggling to adapt to the new rules.
A senior-level marketing and sales executive from a multiregional homebuilding firm described the situation as "the Wild West," noting that the industry is in "vapor lock mode," with many professionals unsure of how to proceed. This paralysis is particularly evident among homebuilders, who are reluctant to be the first to make bold moves in response to the new commission structure.
Implications for Homebuilders
The changes in commission structures pose significant challenges for homebuilders, who now face increased pressure on both their sales pace and profit margins.
Paralysis and Reluctance: The reluctance to be the "first mover" on commissions – given a long history of fits-and-starts business symbiosis between local Realtors and homebuilders' new neighborhoods – is palpable across the industry. Homebuilders are wary of taking the first step, fearing the potential risks in an already difficult selling environment. This hesitation could lead to a prolonged period of uncertainty, where builders wait for others to act before making their own strategic adjustments.
Competitive Pressure: A Fortune article highlights that consumer advocates are pushing for commission rates as low as 1.5% to 2%, a significant reduction from the traditional 5% to 6% rates. This downward pressure on commissions could further strain homebuilders' margins, particularly if they continue to rely on third-party agents to close sales. The potential for lower commissions also raises questions about the value these agents bring to the table, especially in a market where every dollar counts.
Transparency and Value Creation: As discussed in The Builder's Daily's March 2024 article, transparency and value creation are critical in this new environment. We wrote
We discussed some of the high-level implications for new-home sales with New Home Star market analyst Dan White, when a verdict against the National Association of Realtors came down last October. The context for the dialogue was this:
While either direct or knock-on effects of the ruling against the NAR remain in the more-questions-than-answers mode, three root-cause matters make up the opportunity-risk axis for homebuilders and their customers as they navigate tricky and iffy conditions over the next several months. All of this, as the overall economy tries to skirt a consumer household and jobs funk as it continues to cool down the fires of inflation.
- Trust and transparency
- Value creation
- Who pays the price?
Homebuilders must continue to emphasize these principles, not only in their dealings with consumers but also in their relationships with realtors. The ability to clearly communicate the value of their homes and the benefits of working with specific agents will be crucial in maintaining buyer trust and driving sales.
A Long-Term Shift
While the short-term impact of these changes is causing uncertainty, homebuilders must also prepare for the long-term implications.
Adaptation Strategies: Homebuilders must be proactive rather than reactive in this new landscape. This means exploring alternative sales models, such as direct-to-consumer approaches or innovative partnerships with realtors that align with the new commission structure. Additionally, builders should consider enhancing their digital marketing efforts and leveraging technology to reach potential buyers more effectively, reducing reliance on traditional agents.
Technological and Digital Considerations: The evolving role of technology in real estate cannot be ignored. As buyers become more tech-savvy, homebuilders must invest in digital tools that enhance the buying experience. This includes everything from virtual tours to AI-driven customer support, all aimed at creating a seamless and transparent process for buyers.
As we wrote in March:
Creating value for homebuyers
At the end of the day, the buyer experience is what builders want to continue to drive forward," White notes. "If buyers convey to builders that they value this Realtor partner, builders will receive this feedback and welcome it. In that case, their role will continue to adapt. I don't see it going away, especially if that remains the buyer sentiment. If anything, builders would probably lean into and say, 'All right, our buyers are finding value in these partners. How can we best partner with them continue to bolster and build relationships, and break down any barriers that might be there for trust and transparency? Because I think we can all agree on both sides.' In every property deal and new construction, we want the transparency to be there. It's a big purchase. There are a lot of pages in contracts. There's buyers that walk a home from five different builders and they start seeing 10 resale homes and trying to keep it all straight. We want everyone to feel good about their purchase. And they feel like they are being taken care of by somebody and if that's an outside realtor, builders are just going to continue to adapt and lean in."
What builders need to do with regard to the emerging and continuously developing technology – mixing in the trust elements – comes down to a lot of education. There is a shift happening and then we continue to see it where we focus on the buyers' total experience. In all our touchpoints and meetings, we use different educational pieces, collateral, and programs to help educate and make the buyer feel better. Builders are going to need to treat realtors in a very similar regard. The best thing builders can do is to treat a realtor as a future customer whether they purchase themselves, or tap into their buyer pool and their MLS contacts and resources. If builders can help fill that gap and help realtors become good proponents for that for their customers, they'll become good representatives for new construction. They'll be able to add more value, more credibly. That's a role that I think builders should want to take on as more of an education and informing piece.
Who will pay?
It's about the allocation of resources. Builders pay a buyer's agent commission in a resale transaction. That agent provides a lot and is expected to provide a lot and to be involved, to be engaged, be a good proponent for the buyer. Then, in new construction, they just don't need realtors as much. So much of new construction has really shifted to a very easy checkout process. There's just not as much room for value to be brought on the buyer side. So, as the technology and the transparency and the experience have developed, builders are questioning more and more why they're paying the same amount for what at the end of the day comes down to a qualified lead.
In a world where buyer's agents' commissions decrease, builders will continue to do what they have done which is to adapt. But I think they’ll always adapt to the market if commissions are starting to be driven down. They're going to match what other builders are doing. If they're struggling to sell some homes, we bring them information about other builders in the same competitive sphere, that may be offering half a percent more. Then, they're very agile and go meet the market. Builders may hesitate to be the first changers in moving commission. So this might result in kind of an extended status quo, while they're all looking at each other waiting for someone to start to make the first adjustment move. Then, somebody makes the first move and everybody adjusts to the market accordingly.
The biggest thing to keep an eye on is whether the burden of paying the buyer's commission falls onto the buyer's shoulders," White notes. "That may put some additional financial strain on the already raging affordability crisis we're seeing. So, as clear-cut and as fair as that would be, that could easily put additional strain. Builders would have to think and start to consider how that then tailors current incentives, promotions, or lending products that have to get into place or price tweaks in some cases to account for that extra affordability factor. Buyers are struggling right now to save for a down payment, and if they're expected to put down an extra three-ish percent, that adds up fast! Builders' ability to either partner with lenders or have in-house strategies to neutralize this is critical. Affordability is on the forefront of everyone's mind."