Big Builders May Soon See Big Trouble

In the current residential environment of excess demand chasing limited supply, those who control that supply are in the driver’s seat. In the instance of national or regional developers, tensions within the brokerage industry are beginning to run hot. Sadly, those who are likely to lose out in the long term are the sales professionals who are working for the developer, the new home consultants, and the independent builders who have worked for years to establish their reputation and relationships within the industry.

As a general rule, a new home consultant, essentially the real estate agent for the builder/developer, is the face of any given project. They work with and maintain relationships with members of the public and general brokerage practitioners alike. They almost always do a very good job of communicating the intent of the development group, set and maintain expectations on product type, features, and delivery timing, and all-in-all steer the trajectory of any given project and with any given client, public facing or brokerage facing. Today, however, they are being put in very challenging positions and sometimes un-winnable circumstances by their leadership and/or management.

The Process

The customary process works like this; a consumer contacts a brokerage practitioner, a brokerage practitioner tours that consumer throughout any given region, new home developments are identified as potential opportunities for that consumer, the brokerage practitioner contacts a new home consultant within a certain project, and the sales process begins. Usually, the new home consultant will educate the consumer about project phasing (what is going to come online and when), available floor plans and models, available upgrades or additional features offered by the builder, and when a consumer can expect a product to be available for delivery. From there, contracts are signed, and the brokerage practitioner ensures that expectations set by the new home consultant related to product and timing are met.

The Setup

Every project has its issues, and in the normal course of business, all parties are accustomed to working together cooperatively to not only keep the project moving forward, but to keep the consumer engaged in the process and everyone accountable to their respective duties. Today, however, high demand has led to not only mid-sized regional builders, but large public national builders to play fast and loose with project guidelines, contract impacts, and the process in general.

Over the past year, practitioners within our firm have been experiencing issues ranging from deposit percentages being changed at the last minute all the way to final products being unlivable and failing inspections, with a whole gamut of problems in between. The issue is not so much that there are problems or errors. As they say, stuff happens. You work with issues as best you can and move on. Our problem today within the real estate industry is both the frequency at which these problems are occurring and the seeming lack of care or interest by management and leadership of the builder/developer to resolve these issues. Endless excuses to flat out disregard for the consumer have become common place.

The Problems

Physical Construction

We frequently encounter large builders refusing to fix a myriad of issues within virtually every phase of construction; framing, electrical, roofing, plumbing etc. Depending upon when these issues are presented, the outcome can range from slight delay to all together work stoppage. You might then say, “well, these items are inspected by local building inspectors and much of these issues would be flagged for repair or risk failure.” That would be a reasonable position to start from, but we are seeing, at times, alarming disregard and an overlooking of important system checks.

Large developments or individual communities can represent a tremendous amount of inspection work. When an inspector is presented with a street of 20 homes, two, three, four may actually be “inspected,” with the balance then rubber stamped. Most often we see these “rubber stamps” happen in strategic cost-saving phases of construction. HVAC systems, for example, are a demonstrable example of value engineering. Within production communities, they are often undersized and do not perform well during the summer months. The square footage of the building and the tonnage of the system may match when using national heat rating averages, but we are in Florida and there are commonly missing elements of construction that would allow for the full functioning of these systems at the stated tonnage, e.g., radiant barriers in the attic, multi-paned gas filled windows, heat rated doors, etc. These systems are “passing” inspection but are knowingly inadequate.

More frightening is seeing these issues occur in stages of framing, electrical, and roofing. You don’t have to take my word for it. Just ask your local real estate practitioner who represents buyers in production communities about post-completion inspections. This is the stage after the property has been issued its Certificate of Occupancy following approval of ALL building inspections. The buyer hires its own private inspector to verify the property is in the condition the builder is representing it to be. It is more rare for a property to pass these inspections than to fail. Roofing issues are tremendously common; missing shingles, broken or missing roofing tiles, missing flashing, damaged soffits, etc. We see entire rooms out of square, an indication of failed framing. Issues with improperly installed electrical panels, and so on. All of these issues are quite visible and should have been caught if the property was inspected by a building inspector. We often hear from private inspectors, “I have no idea how this passed inspection.”

Then begins the battle with the builder to repair these deficient items. It is not uncommon for delay tactics to be employed, “this crew is on another job,” “that trade is finishing another phase,” “we may give you a credit in lieu of repair.” At the end of the day, there is little the buyer can do. Builder contracts are minimally if at all negotiable, and these issues are often well contemplated within a purchase contract allowing the builder flexibility to do as much or as little as they choose. After all, buyers are lined up for days and if you push too hard, the builder will just move on to the next person. The new home consultant is then put in the position to deliver the message. “My VP said this.” “I just found out our policy changed to that.” “My manager said we can only do X.” The animus then grows for the builder and, unfairly, the new home consultant.

Perceived Market Manipulation

On a growing and more frequent basis, practitioners will be told project “X” will have inventory of “Y” on a certain date and the buying pool will open. Then, out of nowhere, a project phase will be announced to be sold out, however, there will always be a small handful of lots left. So starts the bidding process. It is cutthroat and pricing becomes objectively unreasonable.

I’m all for the market maximizing value for the landowner. All things being equal with supply and demand, that is the proper function of the market when considering the scarce supply we see today. The issue here is what appears to be an inexplicable timing of announcement, then lack of availability, then immediacy of the auction/bidding process and, sometimes, the bidding will then transition to the phase that was already announced to be sold out, an obvious pricing manipulation. All the while, new home consultants are setting timing expectations only to have those expectations altered by management/leadership without their knowledge, understanding, or information. Brokerage practitioners and consumers are left with their ire directed towards the only parties they have any influence over, the new home consultant.

The Fallout

In the short term, lack of supply will force consumers and brokerage practitioners to pound their heads against the wall, but these market conditions will at some point change. When they do, the brokerage market will avoid these builder groups in favor of existing home sales and those builders who have always operated above board. Sadly, the new home consultants within large national and regional groups will be left to suffer. Ultimately, the product will sell one way or another, but brokers will not intentionally subject their clientele to these problems. Builder/developers may wind up with a limited sales force and dwindling sales as they are no longer as effective as they once were in periods of excessive demand.

If the major national and prominent regional builders are to thrive in the next cyclical swing, they would be wise to remember who feeds much of the buying market. Brokers won’t tolerate their customers being exploited any more so than the consumer themselves. When the demand trajectory changes, and it will, these groups should not be surprised when their revenue, stock price, and growth trends do not match up with expectations.

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