New Construction and the MLS
As you know, I’m a startup founder now. My company, Decentre Labs, recently launched an auction-based MLS named Decentre Property Exchange, or DPX. We just finished testing a new service for home builders with the entirely unimaginative name of New Construction Data Service.
This is not a sales and marketing pitch; this is exploring and explaining some underlying issues in the industry that led to us launching NCDS. In a way, I can’t entirely eliminate the consultant in me, so it is also an invitation to other MLSs to engage in trying to solve problems for the builder industry.
At the same time… I am a startup founder, y’all. If you want to blame me for getting the word out about a new service we’re offering that I’m excited about… well, go ahead and blame me.
I was recently on the Market Proof Marketing Podcast with Kevin Oakley, who manages the online marketing for a number of home builders throughout the United States. We went into a lot of these problems and solutions, and I wanted to expand on those a bit more in writing. The episode is here:
A Bit of Background: New Construction
Before we dive in, it is necessary to at least look at how new construction works in the United States. I’m no expert in homebuilding or home builders, but there are a few (obvious) differences that lead to the problems.
Custom vs. Spec
First, new construction can be divided between Custom Homes and Spec Homes. With a custom home you buy a lot, buy predesigned blueprints, choose a bunch of custom features (tile flooring? wood? carpet?), etc. etc., sign a contract, and then the builder goes to work for the next several months to build you your new home. I went through this when we first moved to Houston.
Spec homes, on the other hand, are new homes where the builder has chosen a floor plan, a range of options and features, and has already started to build it. The tradeoff for speed is that the buyer has limited options; and the more a spec home is nearing completion, the fewer options.
For our purposes, the key difference (at least in our eyes at DPX) is that a custom home is not available for purchase - it’s being built for a specified buyer. A spec home, on the other hand, is property that is available; it’s just not completely finished in many cases.
The Sales Process
Second, because spec homes are usually not fully built, the sales process is completely different from resale homes.
For resale homes, the listing agent provides tremendous value to sellers with their advice, their marketing services, and with handling the transaction. For spec homes, a listing agent really doesn’t… and often can’t beyond letting people know a new development is coming. There are too many variables.
Instead, every home builder of any size has salaried in-house salespeople. It is, if you think about it, kind of institutional For-Sale-By-Owner.
Buyers walk into onsite sales offices and work with these salespeople, look at floor plans, look at materials, look at the model homes. And if they buy, they buy from the builder’s representative. A buyer agent can be helpful as an advisor (I used one for my custom home). But… again, the real value of a buyer agent is often with existing homes, rather than new construction since there is very little to negotiate.
Marketing New Construction
Third, because of these key differences, marketing new construction is completely different from marketing an existing home.
For starters, builders often advertise communities rather than individual homes. It’s obvious when you haven’t even broken ground. You don’t have actual homes to sell — only buildable lots and floor plans.
With the advent of the internet, builders engage in online marketing since that’s where consumers are, and they work with companies like Kevin Oakley’s Do You Convert. They also do enormous amounts of multi-channel marketing, using their in-house teams.
There is one important channel, however, that is closed to builders: the MLS. (Unless the builder hires a licensed REALTOR and joins the local MLS… but we’ll get to that.)
Here’s where the problems begin to arise.
The Problems
Let me provide as succinct a summary of the problems for home builders with the current MLS system. There are three major ones, all stemming from the unique situation of new construction.
Listing Entry
First problem is that every home builder advertises new construction with language like, “Starts in the low-400K” because the final price depends on the upgrades/options the buyer selects. This makes it extremely challenging, if not impossible, to list under-construction spec homes in the MLS. What’s the list price?
These homes could be listed… with a lot of data missing since they’re not completed… but you have the manual entry problem for every lot in the new development - sometimes in the hundreds of homes.
Remember that builders have in-house sales and marketing people. These marketing departments spend enormous time and effort putting together materials, professional renderings and photographs, print brochures, etc. etc. and have all of the data in their in-house systems. And then they have to have one person literally type that into an antiquated MLS interface??? The juice isn’t worth the squeeze.
Agents do it, because they have no choice. But this process is a problem for builders at scale.
Unilateral Offer of Compensation
Second problem for builders is that they must, like every other participant in the MLS, offer compensation to buyer agents.
While there are builders who proudly have no issues paying full compensation to buyer agents, most are not quite that sanguine. It isn’t simply because builders are greedy bastards. It is because the unique sales cycle and sales process for new construction is best assisted by the in-house sales rep who knows the ins and outs of the offerings and contracts, and can set the right expectations with buyers. Builders basically have to pay two people to represent one buyer when they list on the MLS.
Were the builder to fail to offer “full” compensation, he would quickly get blacklisted by agents in the MLS. You and I have both seen those comments in real estate social media. We know it happens, and that it is not rare.
Consumer Eyeballs
The final problem we’ll look at is how builders can do online marketing in the current system/environment.
The builders have their own portals, such as NewHomeSource.com and Livabl. These portals do in fact take data feeds from the builders, removing the necessity of manual listing entry.
But they aren’t where consumers go to look for houses. Consumers go to mainstream portals like Zillow, Redfin, Realtor.com and Homes.com to find houses. And it’s not close. NewHomeSource.com — the largest new construction portal — gets 2.5 million monthly visits. That’s not visitors, but visits. Zillow gets 307 million visits, according to SimilarWeb, but that might be low since Zillow gets 212 million average monthly unique visitors.
Back before Zillow became a brokerage and joined the MLS, those spec homes from builders could be displayed on Zillow.com. After Zillow became a brokerage and started taking IDX data feeds… they can no longer be, because of the No-Commingling Rule of many an MLS. That rule necessitated that Zillow create what is known as the “Two-Tab” approach where MLS listings show up as “Agent Listings” on “Tab 1” and all other listings not sourced from the MLS show up as “Other Listings” on “Tab 2.”
The now-defunct non-MLS brokerage REX is suing Zillow and NAR over the No-Commingling Rule because going on “Tab 2” of Zillow meant it died. I believe REX’s traffic to its listings plummeted by over 90% as a result of this rule.
Builders are not suing anybody, but the traffic to their inventory has fallen off a cliff.
So if you’re a builder, how do you get on Zillow? There are two ways.
Send Zillow a data feed and show up on Tab 2; and
Manually enter your spec homes into the local MLS.
They are now forced to have a member of the local MLS, either in-house or external, manually enter listings into the MLS in order to show up where actual buyers are: Tab 1 of Zillow. (Or similar, such as the non-password protected parts of Redfin.com, which is also bound by MLS IDX rules.) This adds unnecessary time and expense to builders, but many don’t feel like they have a choice.
The Solution
After discussions with builders and our advisors, we realized that we could solve this problem. DPX is an MLS, but our unique approach and modern technology means that we are happy to take a data feed instead of requiring manual entry of listings. Zillow (and all websites who want it) is free to take a data feed from us, and all of our listings are sourced from an MLS. We don’t have a No-Commingling Rule at DPX, so the portals are free to do what they wish.
That means Tab 1 of Zillow for new construction spec home listings.
And with our unique buyer premium-based compensation model, builders can welcome buyer agents without worrying about needing to offer compensation. We’ll take care of the agent compensation. No need to fear getting blacklisted, because buyer agents will be taken care of by us, the MLS.
Overnight, we have solved all three key problems of builders with the MLS system.
How About We ALL Solve These Problems?
I said this post is not a sales pitch for DPX, and I meant it.
Helping builders market their spec homes was not and is not a core business of ours. We’re offering the NCDS literally as an essential service.. We charge a nominal fee to pay for developer time, servers, and bandwidth… but our core business model remains matching buyer and seller via open, transparent auctions.
Which means that I am free to encourage the industry to also solve the problems for builders. It isn’t easy, because the world of the MLS is complex, but it is… in a way… simple.
Allow for modern data feeds into the MLS.
Drop the No-Commingling Rule.
Modify the unilateral offer of compensation.
Simply allowing builders to send an automated data feed to the MLS, instead of having to have someone manually enter listings, would solve one of the three problems. Taking a feed is not a complex technology problem.
The No-Commingling Rule is an optional rule. Redfin posted an Op/Ed in 2022 urging NAR to drop this rule, and Zillow has been asking NAR to eliminate it as well for years. All to no avail. 4 of the top 10 and 8 of the top 25 MLSs do not have this optional rule.
My suggestion: the rest of you drop that rule as well. That makes our NCDS less useful for builders; but like I said, this isn’t a core business or a long-term vision of ours. We would rather simply help builders, help the industry, help agents get paid and help consumers find new homes they could buy.
Modifying the offer of compensation is a doozy; I get it. But maybe you can allow it for builders, given their special and very different sales cycle and process. Then educate the agents on why.
In the alternative, reach out to us at DPX and see if we can help you help builders without needing to change policy or upset members. Maybe it is as simple as having your members representing buyers use DPX for the transaction, thereby guaranteeing compensation without needing to pressure the builder to offer it. We would be happy to send you the builder spec homes in a data feed. I think we can find a way to partner for solutions.
In the meantime, we will offer a solution to the real challenges that homebuilders face today in marketing their spec homes online. If you are a builder, please reach out for a conversation to rhahn@decentrelabs.com.
-rsh