Navigating new-home construction sales

by Timothy Inklebarger

The relationship between homebuilders and real estate brokers is constantly changing and getting cozier in today’s market.

Brokers in the business of representing those buying and selling residential real estate will often tell you that one of their favorite things about the job is that every day is different. And while each transaction does come with its own nuances and challenges, many aspects of each sale remain the same — it is typically known, for instance, what percentage will be tied to the commission and generally how long it will take for the transaction to close.

But all bets are off in the world of new-construction home sales, where the relationship between builders and brokers often changes with the strength or weakness of the local market. In a tough economy, buyer’s brokers find themselves being courted by builders with larger commissions and bonuses, sometimes in the tens of thousands of dollars. But when new homes are selling rapidly, like they have been over the last few years, agents not only see lower financial incentives, but often find themselves in direct conflict with homebuilders.

Who’s your agent?

Jessica Kelly, a buyer’s agent at Weinberg Choi Residential, Keller Williams ONEChicago, found herself in such a situation recently, while working with out-of-state clients looking to buy a newly built home in the western suburbs. She’d spent about 30 hours with them conducting an in-depth buyer consultation, mapping out possible homes in new developments and taking them on a tour of homes in the area.

Kelly and her clients were both doing their own research and sharing information. “In the process of coming in for showings, they reached out to several developers to gather more information,” she explained, noting that’s where she found herself at odds with the builder.

A sales associate at the company contacted Kelly’s clients asking if they “intended to bring an agent” during the showing.

The email continued: “The reason I’m asking is because usually, unless they developed the relationship (meaning they brought you to [the builder]) they are not a necessary part of the transaction with a custom home — as we do all of the work involving the lot, home, etc. There [sic] commission is paid for by you, so just wanted to inform you of this.”

Kelly was well aware that homebuilders will sometimes try to claim agency on a client, so she advised them not to sign anything at the showing or online. Signing an intake form at a showing or even just on a builder’s website can create challenges on who represents the client down the road, she explained.

Working in good faith

It’s these kinds of scenarios that make many brokers search elsewhere when directing clients to homes on the market. But that’s not the only hurdle when it comes to selling new construction. Agents often say they avoid the market because of the amount of time it can take to get paid for the transaction, particularly with pre-construction sales.

But industry experts say there are a number of advantages to selling new construction, particularly because of the low chance that a transaction gets derailed by a bad appraisal or inspection.

Christine Lutz, executive vice president of Wolf Development Strategies, a Chicago-based developer services firm, said her firm works hard to cooperate with brokers, because they are vital to the process. “We go out of our way to make sure we are easy to work with in the brokerage community,” she said, noting that brokers don’t easily forget after they’ve found themselves in a confrontational relationship with a developer.

She acknowledged that the long wait to get paid can make it harder to sell properties, so her clients offer half of the buyer-agent commission upfront for luxury condos they’re selling at The Reed, a 440-unit high-rise in the South Loop neighborhood of Chicago that is about a year away from delivery.

“We are competing with the resale market, and it’s harder to sell something that doesn’t yet exist,” Lutz said. “You have to be credible to the buyer and the broker, and ponying up 50% of the commission is a commitment.”

Melissa Camp, senior global real estate advisor at Realogics Sotheby’s International Realty in Seattle, similarly emphasized the importance of working in good faith with outside brokers. Among her most recent accomplishments is the sellouts of Vancouver-based BOSA Developments Insignia in Seattle and One88 in Bellevue.

“I’m very fortunate — every single developer I’ve worked for has realized how important outside brokers are. They are our bread and butter, so we do everything in our power to make their job easy,” she said.

Those that do cut commissions during strong markets are making a big mistake, she added. “The lower commissions are not going to get agents bringing prospects to your project,” she said.

Bonuses are back

Brokers may not have to worry about low commissions on new construction for long — the rise in interest rates and cooling real estate market are already resulting in builders looking to sweeten the deal, according to Devyn Bachman, senior vice president of research at John Burns Real Estate Consulting.

Bachman said July sales were weaker than expected for new-home construction, and 42% have reduced their prices via incentives, but they haven’t yet resorted to lowering the base price. Those buyer incentives include things like rate locks, buydown mortgages, closing cost assistance and flex cash for design upgrades.

Those incentives are extending to agents, as well, she noted. “We’re hearing of increased agent commissions and bonuses,” she said. “It’s one of the levers you pull when the market slows down.”

Spot bonuses of $10,000 for closing within 30 days is one of those levers, Bachman said. Camp noted that she’s seen recent deals that include graduated commissions for additional units sold. The first sale is a 2.5% commission, while the second is 3%, and the third 3.5%.

Commission rates and bonuses are constantly changing, though, so agents have to keep a close eye on builder deals in order to work in new construction. National homebuilder D.R. Horton, for instance, offers 2.5% commissions, but that percentage doesn’t extend to buyer incentives. So, a home in the Chicago suburb of Pingree Grove that has a $7,500 buyer incentive on closing costs will not be included as part of the agent commission, for example. The broker will earn 2.5% on the net sale price, but not on the incentive.

More recently D.R. Horton began a broker incentive program that offers $1,000 on the second home sold, $1,500 on the third, $2,000 on the fourth and $2,500 on all subsequent ones. Some of their new homes, which have been on the market longer, come with different bonuses. One listing in Pingree Grove offers a bonus of $5,000. Look at another builder, and you’ll get a different deal. Lennar Homes Chicago currently offers 3% for new-home sales, but that figure was recently at 2%.

The change in builder generosity can even be seen in markets like Atlanta, where subdivisions and high-rises are popping up throughout the metro area. Engel & Völkers Atlanta founder and CEO Christa Huffstickler said commissions that were at 1-1.5% have climbed as the market has shifted, and now it’s more common to see 2-3% commissions offered for new-home sales.

It’s not just the market

Huffstickler, who has worked in new-home sales her entire career, is an expert on the sales side of the business, but she’s also had extensive exposure to builders and how deals are put together. She said it’s not just the market that influences what builders are offering brokers; it frequently is driven by their financial obligations and schedule for future projects, she explained.

Sometimes builders have to close the books and pay off debt because it will save them in the long run. Other times it’s financing schedules and rate adjustments that compel them to get homes sold more quickly. “It’s not a one-size-fits-all,” she said.

Engel & Völkers Atlanta was recently named lead broker for the 22-story Seven88 West Midtown condominium tower by McKinley Homes. This is less than six months after builder hired its own in-house sales staff. That’s not a sign that the condo market is struggling, though, Huffstickler noted. “McKinley Homes is extraordinary at what they do, and this particular product type is something that we’re extraordinary at, and we were able to bring that specific skill set to that specific product type.”

Reasons to sell

Despite the challenges of new-home sales, experts say it’s still a market worth exploring, particularly because of the relative ease of such transactions. “It is a longer sales cycle, but it’s also a less risky environment, according to Bachman, who explained that with new construction, there are fewer chances for the deal to go sideways. Home inspections and appraisals can easily threaten a resale home deal, she said.

For Camp, it’s the personal touch she’s able to bring to the deal as a representative of the builder that is not a typical part of the resale business. “What I love about what I do is … in the typical resale situation you don’t meet the buyer,” she said. “You (typically) never get to understand what’s going on in their world that’s sparking the move. I often become friends with the buyer, and I try to develop that relationship.”

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