Bridging The Gap Between The Builder And The Sales Agent

Although there are many different profiles of homebuilders, for the purpose of this article we will consider two major sub-categories or classifications: national/regional homebuilders and local “spec” builders. These two categories have been selected since these builders own the land and the home as opposed to custom builders or builders for hire who are selling a service, homes built on your lot.

1.) Large Homebuilders - The large national or even regional homebuilders tend to have in-house sales teams made up of paid employees whose only focus is selling the homes within that specific builder’s projects. Real estate agents tend to interact with these builders only on the buyer’s side (not including large land parcel specialists), and this interaction is usually limited to bringing potential buyers and registering them into the sales process. Many of these builders do not allow their own sales staff to sell anything but their own product so there is no real competition with the independent retail agent.

2.) Local Homebuilders - The next category of builder is the local builder who builds homes on their own lots (often referred to as spec building). This type of builder will often use a real estate agent on the listing side. The majority of the problems that crop up in dealing with this category come from competing interests and a lack of communication or understanding of each other’s business.

One common complaint of real estate agents is that builders expect a very low commission structure due to their perception that they are giving the agents listing volume. This presents a challenge for the agents, as their commission structure is already based on doing a volume of business. The simple fact of multiple listings with one party does not significantly reduce the broker’s or agent’s operating
costs and overhead.

This problem is compounded if the volume that the builder is providing is scattered across multiple sites. In that case, the actual economy of scale is suspect, at best. You need to help builders understand that.

TWO VIEWPOINTS

Communications between real estate agents and builders can be somewhat difficult, as each has a different perspective. Agents often have a hard time negotiating with builders on behalf of their own buyers as they become the voice that is suggesting a lower return on the builder’s investment. Experienced agents
can often lead the builder to see that an offer is simply what a particular buyer is offering to pay; it may be a negotiating ploy but not an indication of true value.

As builders, we often hear agents say “this is what it is worth.” But with the large sums of money we have invested, and the enormous risk involved, this can be hard to accept. It is important to understand that the causes of builders’ perception of the value of their homes are complicated and multiple. Basically builders tend to overvalue items that are not often seen by buyers (ie: better quality lumber or shingles) and they often surround themselves with “yes men.”

If they are not getting insightful and good guidance when they enter a project, and their pricing is not in tune with the marketplace, the real estate agent has to overcome these factors when presenting an offer. As a builder, I am most placated by low offers when the agent attempts to maintain impartiality and can present comps to support the offer.

That’s when we have the best chance to negotiate a successful outcome since there is a basis for discussion. Perhaps a comp that was considered is invalid, or perhaps I reached too high on price and now see the offer is closer to being reasonable. After all, if I push for a higher price it may not reach that point with the appraisal. No point in getting a contract at a high number if it can’t appraise out.

LEARN THE BUSINESS

One of the most effective ways for sales agents to convert builders into easier clients and cooperative partners is by learning about the particulars of the new home market—both the sales side and the actual construction basics. Many trade associations and community colleges offer basic introductory courses that will help real estate brokers and agents with these goals.

This knowledge will also help real estate professionals show potential buyers that they are well informed. Builders often discuss in private a perceived lack of knowledge about construction in many markets. This can create unrealistic expectations that the builder must overcome during walk-throughs and in the warranty period. Education will help the sales agent build a closer and stronger relationship with the builder community.

COMMON MISPERCEPTIONS

One of the most fundamental challenges that real estate brokers and agents must overcome to gain the cooperation of builders is the way that builders perceive them. One of the most common misperceptions by builders is that the agents have no risk. Because homebuilding is so capitalintensive, many builders do not recognize that other businesses are fraught with comparable risk. For example, even the newest agent knows the amount of work and money that goes into marketing and touring with potential buyers.

All of this is done without any guarantee of making a sale. Furthermore the listing could expire without a sale, in which case that advertising investment and open house time is totally lost. Builders don’t have to worry about that—they cannot lose the listing! Of course they have other concerns, but their perception of the real estate agent as having nothing at risk must be recognized and overcome. A direct attack on this perception may be difficult, but the best chance for success comes from a two pronged approach.

First professionalism is key. If your dress and knowledge is consistently top notch,
builders—and prospective buyers—will respect you as a person of authority. The proper attire for new home sales does not necessarily mean fancy clothes and expensive shoes but rather whatever is appropriate. Jeans should be avoided at
all cost, but always have some boots or sturdy shoes available.

Builders perceive agents who are not dressed for jobsites as unqualified for new home sales. The second strategy involves simply being aware of the builders’ misperceptions about agents. This awareness can be used to help establish better communications and avoid major pitfalls. If you are aware of the builder’s negative perceptions and preconceived notions you will be more likely to create a positive perception of yourself.

A young agent who had a listing for one of our homes had done a great job finding a buyer and helping us to get them into contract. The buyer asked me to meet them to allow their painter access to provide an estimate for work that would be done after closing. When I arrived at the home I found it unlocked! I knew that the sales agent had shown it to another party the night before. When I called her, I said I was quite upset that she had failed to lock the door.

She naively said, “Pete, relax! It’s not like there is anything of value there. The house is unoccupied.” As you can imagine, this did not create a positive impression upon me. It occurred to me that she was so used to resales what she was unable to perceive the amount of money we had spent nor the risk of losing the deal if the house was significantly vandalized.

While I understand what she was getting at — there are no personal valuables that can be easily removed — for a builder, a finished home ready to close with a buyer is a major value!

WHAT WE WANT TO HEAR

Now that you understand the misperceptions that builders hold and some of the common pitfalls in dealing with builders, let me tell you what is important to builders as a group. We don’t want to hear a long-winded pitch on your marketing plan. You should definitely have one, but boil it down to a succinct summary. Bullet points are often a good format. We want to be assured that you really understand the new home market and current local sales conditions.

Your years of experience is also important, as is your commitment to learning about the individual builder and their offerings. We also want to be assured that either you will be handling the showings yourself or that you will be assisted by someone you supervise and control, and that they are equally knowledgeable. Never forget that working in an environment that is filled with aggressive, assertive males, builders often respect people with concrete ideas and who can articulate those ideas clearly and succinctly. We are equally impressed with consistent follow-through.

What Went Around Then Has Stayed Around Today

My first by-lined article in this publication appeared exactly twenty years ago this month, at which point in time I had devoted twothirds of my then 62 years on the planet to a career in real estate. This odyssey was first as a salesman, then as a broker, trainer, writer, course designer, entrepreneur, corporate executive, globe-trotting professional speaker and, finally, an enthusiastic participant in the active retirement which continues to this very moment.

A couple of years prior to my debut in The REAL ESTATE PROFESSIONAL “Columny,” its then-and-now Editor/Publisher, Ed DesRoches, biographed my first four decades in the field, with emphasis on the progress of The Klock Company, Realtors®, from (as he aptly put it) “the brink to the bank.” I was, at the time, a battle-scarred survivor of rookie jitters, dumb decisions, bad breaks, inflations, deflations, stagflations, financing crises and the hardships of “kinetic solvency,” the scary science of staying barely beyond wolfbite when “things” got tough.

Ed’s profile, a generous five-page spread, had a happy ending, with the acquisition of the company by Coldwell Banker, then a subsidiary of Sears, and my gradual retreat from active management responsibilities. That trek has led me to my personal variation of existentialism (“I write, therefore I am”), which is where you find me today.


CRITERIA FOR SUCCESS

This column, however, is not about me or my past life. Rather, its focus is on a sidebar in that 1986 article, listing my “Criteria For Success,” which are presented here exactly as written then:

1.) Everything else must rank as a poor second in importance to the reputations of the company and the individuals in it.

2.) The company must never be a “body shop” or a repository for parttime dabblers.

3.) Education must begin on “day one” and never end, for both newcomers and veterans.

4.) There must always be room for personal growth and self-betterment.

5.) Full recognition must be given for individual and group accomplishments.

6.) Compensation must have built-in incentives to reward superior achievement.

7.) There must be no “special deals”; policies and pay scales must apply equally from the president to the newest trainee.

8.) Scrupulous fairness in dealings among all members of the staff must prevail, without exception.

9.) Extensive feedback from the field (ideally through some advisory council vehicle).

Elsewhere, the article recounted our company’s birth pains in 1974, which we euphemistically described as “just about the worst boom year on the record” in Florida. We quickly concluded and subsequently proved that it was (still is, incidentally) a lot less expensive and a lot more effective to train new people from the ground up than to hire away from the competition seasoned practitioners who had grown accustomed to easy pickings in earlier years.

Also, we learned, out of stark necessity, how to cut expenses to (and into, if need be) the bone and to prepare budgets for both the best and worst case scenarios — this last strategy enabling us to both survive a brutal downturn and capitalize on the rebound that eventually followed. As a matter of frightening fact, our “doomsday deficit” projections came within a pittance of reality before the financial tide turned in our favor and we began a welcome sprint, as aforementioned from the brink to the bank.

Ultimately, it proved to be a steady pathway from the gut-wrenching grip of an economic downturn to domination in a highly competitive market. The point to be made here is not that I am some sort of oracle or that I became, as one friendly wag once put it, “a legend in my own mind.”

CERTAIN ABIDING TRUTHS

It is to observe that, while there have been both evolutionary and revolutionary changes in our industry during my lifetime, there are certain abiding truths which stand the test of time and can be, as herein, restated verbatim a generation and more after they are first cited. Among them are the “Criteria For Success” noted above and the lessons we learned during, before and after that “disappointing boom” in the mid-seventies.

All of them, with some necessary massaging, can be applied to today’s conditions, tending to support the notion that what goes around comes around and what went around often comes back to stay. A suggestion from the sidelines: Reread this opusette and apply whatever you can to the situation in which you find yourself today— either as a leader or as a follower — then do what you can to make “things” break your way.

This final thought: You and your people can’t do better than they know how, so don’t skimp on training when you’re trimming the expense budget; it’s the goose that will lay the golden eggs of your future. As a familiar saying reminds us, “The more things change, the more they stay the same.”

The Perils Of Looking Toward The Future

I write for a hundred and some odd newspapers and as a result get a ton of questions from both consumers and brokers. Among the most popular inquiries are queries which go something like this: “So tell me, when will the market begin to go up, when will home prices stop falling and is now the time to buy.” I would dearly love to answer such questions with great specificity but there are two problems.

First, I have no idea where markets are headed. Second, neither does anyone else. The first point should be fairly obvious. Honest, I have no clue. I can’t tell you the future prices of homes on my block, much less the value of homes anywhere else. But the second point is not so clear.

Wall Street, for example, repeatedly tells us that past performance does not guarantee future results — and then proceeds to issue forecast after forecast explaining in great detail why one stock or another will reach a specific price by a specific date. Surely if there can be no guarantee of future results, then making financial decisions on the basis of forecasts from analysts hardly seems like a strategy to be encouraged. Just ask all those happy Enron investors.

NO GUARANTEES

Alas, crystal ball gazing is not confined to Wall Street. In real estate we also have our share of prognostications. In 2005, for example, when the real estate market was booming, the chief economists from Fannie Mae, Freddie Mac, the National Association of Realtors ®, the National Association of Home Builders and the Independent Community Bankers of America jointly wrote a study which said “home price appreciation should average around 5 percent per year from 2004- 2013, but could be above 6 percent if supply constraints continue to tighten.”

(See: “America’s Home Forecast: The Next Decade for Housing and Mortgage Finance”) How come? Our five economic insiders explained that “a stable relationship between income and house prices over time argues against any nationwide “housing bubble.” With the national unemployment rate below 6 percent (and falling), extremely low mortgage rates and economic growth accelerating, the likelihood of a decline in home prices at the national level is quite remote.

Even at a local level, demand-supply conditions today are such that there are few, if any, markets that exhibit bubble characteristics.”

THE THINKERS SPEAK

The 2005 paper follows a long tradition of eminent thinkers with an interest in housing trends. In 1988, for example, economists N. Gregory Mankiw and David N. Weil said “it appears that the real price of housing will fall about 3 percent a year.” (See: “The Baby Boom, The Baby Bust, and the Housing Market”) “The entry of the Baby Boom generation into its house-buying years,” said our two economists, “is found to be the major cause of the increase in real housing prices in the 1970s.

Since the Baby Bust generation is now entering its house-buying years, housing demand will grow more slowly in the l990s than in any time in the past forty years. If the historical relation between housing demand and housing prices continues into the future, real housing prices will fall substantially over the next two decades.” Dr. Mankiw, of course, went on to become chairman of the Council of Economic Advisers under President Bush in 2003.

PREDICTIONS ABOUND

When it comes to real estate predictions it would be difficult to beat 2007. A truly vintage year, we had the chairman of the Federal Reserve, Ben Bernanke, informing us in May that “given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,”.

Not to be outdone, the then-chairman of the Mortgage Bankers Association, John Robbins, told the National Press Club that worries about the mortgage meltdown were plainly off base: “As we can clearly see, this is not a macroeconomic event. No seismic financial occurrence is about to overwhelm the U.S. economy.” Not all predictions, of course, have elicited much public attention.

In 2005 the Financial Accounting Standards Board (FASB) looked at the toxic mortgages then being popularized and modestly pointed out that the huge payment increases associated with option ARMs, negative amortizing, deferred interest and interest-only loans “could affect a borrower’s ability to repay the loan and lead to increased defaults and losses.” (See: FASB Staff Position Paper, SOP 94-6-1)

NO-ONE’S LISTENING

Alas, as my father — a CPA until almost age 90 — could have explained, no one listens to accountants when revenues are rising. So, if you really want to know where home values are headed and when the present market will turn, don’t ask me. I don’t have a clue — and I’m not alone.