David Fletcher

Founder, CEO New Home Co-Broker Academy LLC

Affordable New Home Sales Training For Real Estate Agents. 6,000 graduates!

Local Homebulders Face Realtor Headwinds Created by Production Builders

Attention, small volume (local) homebuilders. Your competition is not the builder across the street. Your more severe competition may be Realtors, especially if the builder is paying higher commissions and bonuses across the street.

Why Realtors?

Because Realtors control qualified home shoppers, many who just sold their homes can be eligible for homes requiring a heavy down payment.

Why do Realtors If your competitive builder is paying a substantially higher co-broker commission, it will not meet the Realtor's prospects.

Primarily if your co0broker sales represent 70 percent or more of your sales, you find your Realtor traffic next to zero because you are paying a much lower commission.

There was a time, as noted by a keynote speaker at the 2012 International Builder Show, builders were told that their competition was not the builder across the street. Their competition was the Realtor with the qualified resales shopper in their car.

That was then.

Today your competition is both Realtors and production builders, especially those who are paying much higher commissions.

"I don't have a shot," said the onsite consultant for a local builder. The builder across the street is paying five percent co-broker commissions. We are paying three percent.

"I had 14 sales in the last twelve months, 11 co-brokered.

"I've had no sales and virtually no Realtor traffic since the builder started paying five percent commission across the street." No sales in the previous two months," she said.

But wait! The builder may show more homes to qualified shoppers thanks to Realtor traffic, but his sales have more to do with interest rates and incentives.

Mortgage rates and incentives aside for a moment, the fact is, real estate agents are controlling the qualified buyer, and the chances of them selling one of the small volume builders is zero, nada.

"That's the problem,' said the onsite consultant. Just look across the street. They have the traffic coming in every day, most of which is probably with Realtors.

"Of the 12 we sold last year, nine were sold through Realtors, but since the builder across the street started paying six percent, we don't see them anymore.

Here's the challenge.

Rather than focusing on the actual marketing issue, a lack of broker sales, they focus on 'greedy brokers'. 

He is greedy by taking his clients to the production builder that pays a six percent commission. It's an easy call from the builder's perspective.

But it is the wrong call.

 It's about as far from building a new home broker network as the builder can get.  

The small volume builder must look beyond the broker's faults to the onsite agents' needs. Onsite agents need a competitive product with competitive incentives.

If builders, regardless of size, don't concentrate on competing for co-broker sales, the price, incentives, and mortgage rates don't matter. They will find their home used as a 'sell against' trained new home co-brokers who will show the builders homes to help sell the builder's home across the street or a resale just down the road.

 There is nothing wrong with comparison shopping. We all do it.

So, let's assume the small volume builder decides that, at least for a while, he will raise the real estate co-broker commission to six percent to compete with the builder across the street.

 He is now in a position to compete with Realtors to bring their qualified buyers to the builder's sales office.

The challenge is to make the model beautiful and add a base price that makes competitive sense compared to other models in the community or subdivision. Easy.

Suppose the going mortgage rate is 5.75, and the production builder across the street offers a 3.75 mortgage and $10,000 cash contribution to closing costs.

Should the local builder offer a competitive mortgage and cash contribution as well? Does he have a choice?

Once the local builder knows mortgage costs, it's easy to evaluate incentive margins such as cabinets, fixtures, etc.

Now the local builder can be assured of three things:

  1. Broker commissions will attract Realtors with qualified prospects.
  2. Realtors will consider the builder price, and package value is salable.
  3. Brokers will consider the mortgage package competitive

There is only one thing left to settle: Incentives.

Without incentives, the builder has no competitive closing tools. All builders know this.

The production builder across the is offing a $6,000 incentives package. The local builder does not have to match the incentives package but needs to be competitive and flexible case-by-case.

Will the above make any sense to the local builder? A review of projected absorption costs projection will help the decision process.

Assume the base price of the home is $500,000, and fifty percent of the sales are projected to be co-brokered at a six percent commission.

The co-broker is paid $30,000 for 50% of the homes sold. Walk-in traffic will cost the builder zero for co-broker sales. So walk-in traffic sales are essential.

 If this projection is realized, the actual overall sales cost outside the onsite consultant will be 3% or $15,000 a deal.

The goal for the small volume or local builder:

  1. Compete toe-toe with the production builder across the street. Use their package as your baseline and modify your commission/mortgage/ incentive package accordingly.
  2. Offer your onsite sales team incentives for walk-in sales. By doing so, the builder is providing strong incentives for both

The good news is that the demand for housing exceeds the supply. Production builders establish prices, packages, and promotions on market research, as they should.

Local builders have faced options when it comes to 'the builder across the street." They can ignore the builder. They can treat the builder as a problem to discuss or accept as real competition and respond accordingly.

But one thing all builders have in common in today's market:

Realtors control motivated, qualified buyers, most of whom have homes or had homes to sell, which is how the Realtor met them in the first place.

All numbers used in this piece are fictitious and provided for examples only.

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