Mergers, Acquisitions, Consolidations: Oh My!

March 1, 1997

Franchises are grabbing an increasing market share of industry revenue. Mergers and acquisitions are reducing the ranks of midsize brokerages. Profits are evaporating. The 1990s have been rough on the average broker--and the future promises more, rather than less, competitive pressure.

In this section, we provide two outlooks for the future of brokerages. One gives an overview of the consolidations, mergers, and acquisitions that are shaping the industry of tomorrow and how independents compete. The other examines the effects of shrinking profits--and how brokers are trying to produce a turnabout by reducing overhead and finding new revenue sources.

As part of the profit outlook, we profile brokers who are taking three different approaches to bolstering profits: unbundling services to salespeople, creating alliances with affinity partners, and cutting central office space.

When franchise giant HFS Inc. barged into the real estate industry, it abruptly altered the marketplace and boldly awakened any real estate professional who might have thought change was in the distance.

Like an erupting volcano, HFS spewed millions of dollars to buy up Century 21, ERA, and Coldwell Banker in a year's time, grabbing a hefty market share and invoking new ways of doing business. And it didn't stop there. HFS thundered ahead with the acquisition of other businesses, including the relocation company PHH Corp.

''HFS certainly has gotten everybody's attention,'' says Steve Kieburtz, chief executive officer at Windermere Real Estate Northwest, which has about 5,000 salespeople and some 200 offices in Washington state, Oregon, Idaho, and Canada. ''HFS is one entity acquiring so many franchise brands. It's way too early to tell what the manifestations of that might be.''

As more companies are bought up, bought out, or go belly-up, the real estate industry is consolidating at a pace that many say will continue through the decade. Industry observers also believe mergers and acquisitions will steadily change the playing field, shrinking the number of companies that do business.

In 1996 at least one of every five real estate companies--21 percent--was affiliated with a franchise organization, according to research by the NATIONAL ASSOCIATION OF REALTORS®. Moreover, franchise groups represented 37 percent of all salespeople last year. By contrast, 15 percent of companies were affiliated with franchises in 1986, representing 28 percent of the sales force.

Middle Dropping Out

''The big are getting bigger, and the niche players are continuing on,'' says P. Wesley Foster Jr., owner of Long & Foster Real Estate Inc., Fairfax, Va., which has 120 offices in the mid-Atlantic states and 6,000 sales associates. ''The middle players are dropping out, but the small mom-and-pop shops seem to hang in there.

''It's getting much more difficult to make a living in this business. We're in the mortgage business, and we're going to get back into the title business.''

With the rise in ancillary businesses among real estate companies as a way to boost profit levels (see page 47 for more on affinity relationships), Dorcas Helfant, a former NAR president and a broker-owner, says a new competition is emerging. It's centered on ''the early ownership'' of the consumer.

''There's a real battle for control of the customer,'' says Helfant, owner of Coldwell Banker--Helfant Realty in Virginia Beach, Va., which has 20 salespeople and two offices. ''We're seeing pressure on pricing in the industry and more sources of contact for the customer.''

Indeed, when it comes to buyers, she says, incentives work. Brokers affiliated with airlines that offer free trips for the home-buying public are already ahead of the game.

''Lenders are inviting customers to use them and are offering a free vacation with a home purchase,'' Helfant adds. ''Customers can go to Wal-Mart and buy through their broker and get a rebate. If I'm the buyer, t hat rebate is cutting my cost and helps my entry into the housing market.''

Helfant says she believes the larger franchises are gaining strength in the market in part because they can offer more services to consumers--from mortgage and title services to security systems and satellite dishes.

''I could not have made it as a small to medium-size independent,'' she says. ''I couldn't spend enough on product development to compete with the big boys. There's no way in the world I could have a CD-ROM training program for my salespeople.

''That's why I'm a franchisee. I'm relying on this company's reputation,'' and on its ability, she adds, ''to provide tools and assistance to allow me to compete.''

Salespeople Are Businesspeople

Bill Lublin, president of Century 21--Lublin-Beck in Philadelphia, which has four offices and a sales staff approaching 100, says that ''it's just more difficult to be profitable today'' than when he opened his first office as an independent in 1983.

''It's all about keeping your eye on the bottom line and remembering you're a businessperson,'' he says. ''Real estate people don't always remember they're businesspeople. They're good salespeople. They're warm and fuzzy. They know how to build a bond between individuals, but some don't know how to read a profit statement.

''I was an independent for 11 years before affiliating with Century 21 in 1994,'' he adds. ''New salespeople wanted training, and franchises offer that. Consumers are extremely comfortable with size. And with a franchise, you have an affiliation that makes you much larger than your office--national referrals, technology, networking. Those things are tremendous. But a franchise won't make a bad broker profitable. It's a good tool for a good broker to utilize.''

In the northwestern United States, Kieburtz says, Windermere's competitive edge against national franchise brands lies in its local experience. Windermere started out as an independent company and has since become a regional franchise.

''The way we've chosen to compete is, instead of on a national basis, we're exploiting our niche and our strength, which is knowledge and expertise, in the Pacific Northwest,'' he says. ''We do have local market knowledge, and when you get right down to it, this business is very regional, even neighborhood specific.

''The consumer wants to know, what can you do for me right here?'' he says. ''We live in the same communities buyers do. That gives us an advantage that's key to our salespeople.''

PROFITS UNDER PRESSURE

Brokers are striving to add more profit to their companies following an earnings squeeze that was first identified in 1994.

Broker Average Earnings Before Taxes (Percentage of Gross Revenues)

1988 6.5%
1991 6.7%
1994 2.6%

Source: NAR Research Division, Real Estate Brokerages, Income, Expenses, Profits, 1995

Carole Fleck is a former senior editor for REALTOR® Magazine.

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