Buy, merge or franchise — they’re strategies many brokerages are pursuing in an effort to grow their businesses in an increasingly competitive market. But what are the benefits of these approaches, and what are the hurdles?
Some brokerages are taking dual paths in the expansion game, concurrently purchasing brokerages and launching their own franchise operations.
Chicago-based independent brokerage @properties made a splash when it recently acquired luxury brand Christie’s International Real Estate, but did the move signal a shift in growth strategy within the industry? Not necessarily.
Franchising, acquisitions and agent recruitment all have their place, but the common thread is merging and sharing resources aimed at growth for agents and brokerages large and small. Fallout from the COVID-19 pandemic and U.S. workforce trends as a whole are influencing expansion plans, too.
“I think we’ve definitely seen a trend toward aggregating, whether that be through acquisitions or joining a company through a franchise,” said Nick Warren, CEO and founder of Warren Residential in Boston, a franchisee of Berkshire Hathaway. “I think we’re seeing more and more of that.”
Thad Wong, co-founder and co-CEO of @properties, said the company’s in-house technology helped separate it from other suitors trying to acquire Christie’s, a process he described as “incredibly competitive.”
“Our interest in Christie’s was to wrap our infrastructure, our technology, our marketing, our training and coaching, wrap it with a Ferrari brand, and everyone will want it,” Wong said.
“I remember building @properties and how hard it was to turn @properties into a luxury brand. It took years to be the No. 1 in Chicago in luxury … so it’s much easier when an agent walks into a listing presentation and says, ‘I’m with Christie’s International Real Estate.’ It just brings a tremendous amount of credibility out of the gate.”
Within the last three years, @properties also acquired Ansley Real Estate in Atlanta and Nest Realty in Virginia. The growth strategy also includes adding recent franchises in Detroit, Indianapolis, Dallas and La Crosse, Wisconsin.
Whether it’s through acquisition or franchising, Wong said his goal remains the same: To empower independent brands to succeed.
“I believe heavily in the ability for an independent brokerage to succeed, but the challenge today is they have to provide the agent with the best technology on the market. Otherwise, they’re providing a disservice. And they have to provide … the best training and coaching,” Wong said.
“If I can offer them that entire infrastructure and on top of it, I can give them the best luxury brand for luxury listings, now I’m empowering them to be able to do what they do best, which is providing a culture to their agents, providing leadership to their agents, providing relationship enhancement and culture, so their agents can grow faster than their competitors.”
John L. Scott Real Estate in Bellevue, Washington, is another company that is taking a multipronged approach to growth. The 90-year-old firm has more than 100 offices and 3,000 agents in Washington, Oregon, Idaho and California.
The company’s most recent growth focus has been on teams, said Howard Chung, John L. Scott’s vice president of franchise development.
“We’re starting to see this evolution of going after the team,” he said. “A team can very much become a franchise, save money and earn additional value to their business entity.
“Our last three franchises started out as teams, and they quickly became very successful franchise owners and are able to recruit agents because of that,” he added.
Chung estimated John L. Scott’s expansion efforts as one-third teams, one-third mergers and acquisitions, and one-third pursuing people with other franchises.
And there are more acquisitions than people may realize, he said. You definitely see the big ones, like Christie’s and @properties, but some of the smaller mergers fly under the radar. Some smaller operators are eager to sell once they reach retirement age, or they may not want to endure another downturn, and that presents opportunities for larger companies to make an acquisition.
The fit has to make sense, though.
“Culture, of course, is huge,” Chung said. “We’re looking for people who have that desire and growth mindset.
“Our philosophy,” he went on, “is if you’re going to be in the business, let’s be in the business. We can impact a community, not just do a few deals here and there. We want productive, community-minded agents. That’s the franchise of the future for us.”
Wong noted the importance of finding the right fit, as well, and talked about some of @properties’ recent deals as partnerships more so than acquisitions.
“Our goal is not to really buy a lot more companies,” he said. “I think it’s hard to operate and manage corporately owned offices that if you’re not there, you’re not hands-on with every single one. I think it’s hard.
“The ones that we’ve bought are interesting because the ownership is reinvested, so they’ve become partners with us. They haven’t just cashed out … but they are running the company as true partners.”
Warren has the unique perspective of seeing things from the position of the franchiser and the franchisee. The initial growth plan for Warren Residential, founded in 2008, was to build up the brokerage to become the franchiser, but Warren quickly realized that was an uphill climb and a different business.
He eventually was approached by Berkshire Hathaway in 2014, and, recognizing the growth opportunity, Warren signed on as a franchisee in 2015.
He recommends potential franchisees focus on fit and then follow through to take advantage of the value of being part of a larger operation. There’s an opportunity to lean on other leaders and leverage the technology offered by a large franchiser, he said.
“You want to make sure who you’re getting married to, understanding the brand and the value of the brand,” Warren said. “Like anything, you should take advantage of the additional resources. You have to be proactive about things. You have to be vocal, the same way I encourage my agents to be vocal with me … like any relationship, there has to be communication.”
Whether it’s through franchising or mergers and acquisitions, the industry is moving in the direction of partnerships, and there’s no sign of that slowing down, Warren said.
The franchisers are eager to expand, and many smaller and midsized brokerages are eager to leverage the value of being under the umbrella of a large brand.
“There’s economies of scale that make sense,” Warren said.
The National Association of Realtors recently released its every-other-year report on residential real estate franchises. It showed 12% of real estate companies are independently owned franchise companies, an increase from 11% in 2019. And 42% of NAR’s members are linked with a franchise, the same percentage as 2019.
Those numbers are relatively steady, but they represent an uptick from the 2015 report, when the numbers were declining and some predicted the franchise model would need to change or wither away.
Some of the recent change is due in part to the COVID-19 pandemic, plus the Great Resignation trend in the U.S. workforce, with thousands of people looking for a job outside the traditional nine-to-five format.
Today’s franchises may not need as much physical office space and staff, and they can save on overhead. Focus on branding and digital strategies are at the forefront and allow franchisees to succeed, Chung said.
And the next generation of agents is looking for flexibility, as well as for companies that are focused on diversity, equity and inclusion, and building green. The companies that are serious about those initiatives will be best positioned for growth and success, Chung predicted.
“It’s the right and responsible thing to do now,” he said.