The Future of the Franchise
REALTOR® Magazine’s Residential Franchise Report offers an opportunity to examine the trends and trajectory of real estate companies old and new.
July 15, 2015
Every two years, REALTOR® Magazine reaches out to residential real estate franchises operating in the U.S. and asks them to complete a questionnaire about their size, operations, and contract terms, among other information. We use that data to compile the 2015 Residential Franchise Report, the results of which you can see here.
This year, we wanted to dig deeper to identify some of the larger shifts going on in the industry, both by looking closely at the results of this year’s report and by speaking with a few of the brand representatives of franchises that provided their data for it. We talked to franchises both well-established and new, those working to reenergize long-recognized identities and others forging unexplored paths in the industry. The theme that ties all these companies together is that, while they value technology and readying brokerages for the future of the industry, they all concentrate on attracting the best broker-owners and salespeople to represent the particular values of their brand.
“It’s all about culture,” says Realty ONE founder and CEO Kuba Jewgieniew. His Irvine, Calif.–based company only began franchising in 2012, though it’s been around for a decade. “We’re in the people business, so aligning ourselves with top talent is important.”
Shrinking Office Syndrome?
A majority of franchisors expanded their residential real estate offices in the United States in the past two years. However, nine of the 32 franchises, or about 28 percent, either lost U.S. offices or maintained the same number they reported in 2013. The largest franchise to reduce its number of offices in the past two years was Century 21. Senior Vice President of Franchise Sales Mike Miedler says that while the continuing shakeout from the downturn was part of the equation, the company also made a conscious decision to refocus on a different kind of growth strategy and cut loose offices in certain secondary and tertiary markets.
“A lot of it was us kind of level-setting,” Miedler explains, who is based in the New York City area. “We looked at who are the companies we want representing us and we saw the need to ask some of these franchisees to step up or step out.” Century 21’s global growth strategy also helped shift the focus of their expansion efforts; Miedler says the company adds a new country to its roster every few months. Late last year Century 21 announced new offices in Cambodia, India, Peru, and Tunisia, noting its business extends to 75 countries and territories. In our 2013 report, Century 21 estimated having 4,600 non–U.S. offices, while it reported having 4,671 by Feb. 1, 2015.
In this year’s survey, 14 of the 32 franchises that participated reported having at least one international office, and a fifteenth — relative newcomer Berkshire Hathaway HomeServices — indicated it’s planning to open up international branches soon. Though 16 franchises reported international offices in 2013, the total number of international offices was about 250 fewer than were reported this year. Note: While the last two reports each contained 32 franchises, the participating companies were not identical, so the comparison is not an exact one. However, the general trend seems to be that there are fewer franchises with just one or two international offices, and some bigger brands are focused more intensely on global expansion than they were before.
Some see the shrinking number of U.S. offices run by well-established brands as a sign of bigger, systematic changes ahead. James Dwiggins, CEO of the brand-new franchise NextHome Inc., sees further constriction in the franchise industry in the coming years, predicting that “a lot of the bigger brands you are going to see decrease over time.”
NAR data appears to bear this out. The number of members who are affiliated with franchises has dropped from 40 percent in the 2013 member profile to 38 percent in the 2014 version.
Dwiggins says the reason for this is that the franchise system isn’t set up to meet the needs of smaller and midsize businesses, citing the NAR statistic from the 2014 Profile of Real Estate Firms that 81 percent of brokerages consist of a single office, typically with two licensees (up from 80 percent in the 2013 profile).
“There isn’t anything in franchising designed for that demographic,” he says. “If franchises don’t get more nimble, I think they’re going to shrink.”
The 2015 Harris Poll EquiTrend study, which ranks brands on the strength of their connection with consumers, named Better Homes and Gardens Real Estate their real estate agency brand of the year, followed by Berkshire Hathaway HomeServices and Keller Williams.
But Dwiggins says the answer proposed by some newer franchises on the scene — slashing brokerage costs and promising bigger commission slices — won’t cut it in the long run. “The ones that are growing the fastest are the ones with the lowest fees, but in my opinion that’s a race to the bottom,” he says. “What we should be doing is raising the value for franchisees.”
Preparing for the Future
This year, we added a query to our questionnaire about how franchises are preparing brokers and agents for the future of real estate, and we heard a great deal about new training programs and technology. RE/MAX called out its events as having an “intense” focus on the future of the industry. Help-U-Sell Real Estate identified the need to train new brokers to deal with the influx of first-time buyers they expect in the coming years. Keller Williams identified territorial expansion as a main tool it could provide agents through its training programs, while representatives from America’s Realty say they want to teach agents how to invest in real estate.
As a relative newcomer on the scene, Berkshire Hathaway HomeServices’ approach to determining what is most needed to prepare brokerages for the future is still in the research phase, but its breadth is impressive. The company’s business consulting team invited nine brokerages around the country to participate in the “Office of the Future” project, which seeks to identify the success factors of different groups. The yearlong project seeks to collect data about how leadership, culture and other factors can contribute to broker and agent success.
Why don’t franchises have mascots?
NextHome CEO James Dwiggins couldn’t think of a good reason, and that’s how Luke was born. When the company decided to place a likeness of the French bulldog next to its For Sale signs, agents initially worried the bright orange, dog-shaped addendum would be stolen by neighborhood kids. “Exactly,” Dwiggins thought. Knowing that if the kids down the street stole Luke, the parents down the street would inevitably become involved, Dwiggins added a “If lost, contact ____” message on his tags that would lead them right to the listing agent, turning the incident into a potential tool to generate business. “The agent now connects with the consumer down the block,” Dwiggins explains. “It’s something that’s fun, but also provides value.”
Glenn Miller, director of business consulting at HSF Affiliates LLC (which operates Berkshire Hathaway HomeServices, Prudential Real Estate, and Real Living Real Estate) says the company is still studying different office layouts to see what works best in various locations. But he was particularly surprised by how much the look and feel of a physical office could change not only the walk-in rate of new clients but also the way agents interacted with each other. “The culture and the floor plan have contributed to an unofficial partnership between agents,” says Miller. “It fosters a level of accountability to one another that you rarely see among independent contractors.”
Focusing on the Consumer
The very nature of being a franchisor is different from the average corporation in that these companies have several masters they must serve. If they didn’t have franchisees, they wouldn’t exist, so they must attract broker-owners who want to affiliate themselves with their brand. But a main goal for most brokerages is to attract competent agents and enthusiastic consumers, which means franchises need to appeal to the general public as well.
Indeed, many of our questionnaire respondents identified focusing on the needs of the consumer as a way to boost the business of their franchisees. Century 21 in particular noted the need to reach out to the next generation of home owners, specifically millennials and Hispanic buyers. “We’re spending a lot of time, money, and effort on that,” says Miedler. “It’s an eye that [CEO] Rick Davidson, as well the rest of the company, has on understanding how to service those folks.” The company is also working with the National Association of Hispanic Real Estate Professionals on the initiative.
Part of being able to meet the needs of tomorrow’s real estate consumer is being visible (and making sure brokerages and agents are visible) in the right venues. Miedler says maintaining Century 21’s high ranking with comScore (a Reston, Va.–based company that publishes online marketing and analytics data) in both online and mobile traffic is key to their value proposition. “When a consumer has a real estate need, the first thing they do is go online. Our goal is that, when they do, they find Century 21,” he says. “We make sure that everything we do online is all mobile-friendly so that anyone at anytime can see [our agents and brokerages].”
Another key is making sure you’re listening to what home buyers and sellers want. Dwiggins says NextHome surveyed consumers and found that simple upgrades to For Sale signs—such as a rider detailing bedroom, bathroom, and parking spot totals in a listing—greatly improved their utility for home buyers and sellers alike.
“Here’s a simple thing that we’ve been doing for 100 years that turned into a billboard for the agent,” he says, noting that for all the many adaptations real estate has made, signs have changed very little. “That’s not what a consumer wants.”
The Independent Streak
So what does a top broker or agent want from a franchise? Jewgieniew says that the days of having one answer to that question are over. Executives at Realty ONE spent years studying the needs of those in their “company stores” before they began franchising in 2012, to determine the suite of tools they needed to provide as options for franchisees.
“We’re offering a business-in-a-box, if you will,” he says, noting that the franchisees they brought aboard who had been with other real estate companies often complained about having had minimal support from their previous franchisors after initially signing on with them. “We want to offer that proven model to the franchisees so they can leverage all the tools, all the departments, and everything that we do to service our company stores.”
Though Berkshire Hathaway HomeServices intends to use the results of its Office of the Future program to help brokerages and agents improve their businesses, none of those improvements will be accomplished by fiat. Instead, Kevin Ostler, director of communications and PR for HSF Affiliates LLC, says the franchise wants to respect individuality and regional differences across all of its offices: “The idea is to hope it sparks new ideas, so they can stand on the shoulders of innovation.”
Dwiggins says that the desire to get franchisees on the same page no matter where or how they operate is in direct opposition with the way real estate works on the ground. “If real estate is local, and if real estate is all about relationships, why not create the ability for [brokerages] to stay local?” he asks. “It’s about making sure the consumer understands from end to end that the agent is the most important part of the real estate transaction.”
This shift toward individuality may even be extending to the agent level. Jewgieniew says the understanding of the brokerage as the unit of highest value for a franchise company is changing too. Realty ONE is currently rolling out a program whereby top producers are recognized in sharable video form, creating a polished marketing piece at the same time that they reward their best performers. He notes that not all improvements to their systems should be concentrated on the needs of broker-owners. “Back in the 90’s, brokerages felt they were first in line, but now the mindset has shifted,” he says. “Without the agent, we’re dead.”