The Evolving Dynamics Between Home Builders & Realtors: A Post-Settlement Analysis

Nov 18, 2024 | By Kevin Oakley

It hasn't been obvious to most how homebuilders and Realtors should be working together – or at least how we should be thinking about their relationship – after the NAR settlement. This article is my attempt to provide some clarity and bring to the surface some ideas that need to be battled back and forth openly among leadership teams at the best home building organizations in the country.

The Old Triangle vs. The New Reality

There used to be this triangle relationship between the home builder, the home buyer, and the buyer's agent (the one helping the buyer with their purchase). All three had clear connections to each other, forming a complete triangle of relationships.

But post-settlement, things have changed. The main point is clear: the home buyer is responsible for compensating their agent unless the seller concedes to pay the expense. That means the connection between the home builder and the buyer's agent has been largely severed. We're left with a different structure where you still have all three parties, but the home buyer is the only one connected to both the builder and the agent through direct contractual relationships.

Why Are Builders Trying to Jump Back In?

Here's what's interesting and puzzling: Why are home builders so eager to reinsert themselves into that relationship? I'm watching builders rush to tell buyer's agents, "Don't worry, we'll still compensate you - sometimes up to 5%!" They're trying to preserve that old connection, and I'm not convinced that's a great idea.

I tried to list out all the reasons why builders might want to get back in the middle of that relationship:

1. We need more leads!

I understand why - since most builders have a large percentage of their transactions that include agents, the perception would be that they also own most of the relationships with potential leads. However, Realtors don't have leads right now either. The used home market is actually the worst it's been since 1995. The only agents with lead volume are the ones paying big bucks to portals like Zillow, Realtor.com, and homes.com. These agents give up to 40% of their commission – not just a flat fee – to get those leads. So, really, the portals control those relationships and leads, not the agents. (Maybe we should be sending our "I love you" notes and "we'll pay whatever necessary" messages to the portals instead? I'm mostly kidding.)

2. Agents will help smooth out the buyer relationship!

As soon as I wrote this one, it made me laugh because, in my experience, it's usually the opposite. Realtors, in their enthusiasm to show value to their customers, almost always make the relationship more contentious. This will likely increase post-settlement as the buyer asks, "What am I paying you for if you can't help improve this situation for me?" This isn't a high-value proposition from the builder's perspective unless your buyers have an existing house to sell. Then, they can remove friction and help them move forward - but the agent is compensated for providing that separate service.

3. Realtors are better at marketing than our in-house team!

While this could be true, it really shouldn't be. Only the top 1-3% of agents or agent teams in any market do extensive advertising and marketing, and most still use outdated methods (bus benches, grocery store shopping carts, or a free calendar magnet). The ability for builders to go "direct to consumer" and connect with them early in their new home search has never had higher potential. Before digital tools, the personal networking effect of the best agents was significantly stronger by comparison than they are today.

4. Realtors are better at sales than our in-house team!

I saved this one for last because while I find it equally unlikely to be true - many senior leadership teams believe it. I've known division presidents and owners who have spent more time dining and networking with top buyer agents in their market than interacting with their sales teams or customers. I've been told, "I believe 30% of our sales come from my direct efforts to connect with agents who sell our homes for us. It is more consistent than our own team's efforts."

I'm sure I've missed something (let me know!), but I can't uncover a reason to wish for the return of the old triangular relationship to return. Part of the desire then is simply habit - "we've always done it this way" or fear of change. That’s never been a good reason to continue doing anything – and it occurs to me this scenario isn’t any different.

Why Do We Pay Realtors Anyway?

Okay, now that we've covered how that triangle relationship has changed post-settlement, let's explore some other important pieces. First up: why we historically compensated Realtors.

Everyone always said it was "procuring cause" – that they were the ones who brought the lead to the builder. If we're being honest, that was never quite true, but now it's 100% not true. Why? Because we don't pay the agent at all anymore – the buyer does.

The New Rules of Compensation

Here's what's really important to understand: post-settlement, the amount a buyer is going to pay their agent must be determined upfront when that buyer first reaches out for information on a home. Before the agent is supposed to do anything with that customer, they have to agree to a contract with clear terms of compensation.

So here's where it gets tricky – if that amount is being determined upfront and the home builder is offering more, the agent can't collect that additional amount. Some have asked, "Well, can we pay more directly to the agent on top of that agreement?" No, and this is actually a danger zone. It goes right back to the core issue of conflicts of interest between Realtors and the customers they're supposed to be serving. Paying them more degrades their ability to perform their fiduciary duty to act in their client's best interest.

Do We Still Need Agent Pre-Registration?

This brings up another interesting question: Do we need to require Realtors to pre-register their customers at all today? I don't think so. Why? Because we're not compensating them, we can't compensate them for procuring cause. We're only compensating them because their client wishes us to do so.

The Consumer Benefit Question

Here's something our industry needs to discuss more openly. It's been common for a customer to ask, "If I don't have an agent, is there a benefit to me, the consumer?" We've always told them no, explaining that the money was set aside from advertising or marketing to pay for procuring cause.

But now? We're paying the Realtor at the buyer's discretion. This means customers need to be informed about the tradeoffs of that decision, which means there should be a benefit to a customer who doesn't need an agent to represent them.

The Current Market Reality

Most builders are still too concerned about soft market conditions to make any changes that might upset Realtors. But remember two things:

Realtors don't have leads right now either – you're not missing out on much. (drawing of a Realtor looking in their “box of leads” only to find it is empty?)
The vast majority of agents do fewer than two transactions every year. This group of low-volume agents, often working part-time to leverage their local connections, are the least likely to want to approach their brother-in-law saying, "Hey, I'd love to help you purchase a home" – because they'll have to immediately whip out a contract explaining how their brother-in-law needs to pay them $25,000.

Late Additions and Changes

Let's talk about late additions to contracts, where Realtors try to parachute in at the last minute. Remember: only the buyer can direct this. Realtors can't show up and demand compensation because you don't compensate them – you're giving a concession to the buyer who then directs that money to the agent.

Once the mortgage is finalized, we can't change concessions. If a buyer wants to add an agent 30 days after the initial contract, it's much smoother if you've already explained the tradeoffs to them. Otherwise, you'll have to explain that other concessions must be removed to cover this new expense.

Looking Forward

It's a brave new world, and like all things, we need to approach it with awareness, transparency, and creativity. Here is the bottom line: continuing to accept or even crave a pre-settlement structure doesn't benefit anyone—not even the best buyer's agents. Re-evaluate who is in charge of what part of the relationship and where value for the customer is highest, and allow that to guide you forward.