Business Monday

Heightened merger activity in the residential real estate brokerage market to continue in 2019

According to a National Association of Realtors conference presentation on residential real estate mergers, “One must pursue a merger or acquisition with caution and proper due diligence. However, with the right set of circumstances — culture cohesion, solid leadership and management, flexible employees, deft market positioning, a copacetic economy — a merger or acquisition can be a sound decision.”
According to a National Association of Realtors conference presentation on residential real estate mergers, “One must pursue a merger or acquisition with caution and proper due diligence. However, with the right set of circumstances — culture cohesion, solid leadership and management, flexible employees, deft market positioning, a copacetic economy — a merger or acquisition can be a sound decision.” Getty Images/iStockphoto

The pace of consolidation of the South Florida residential real estate industry seems to be accelerating with the continuing announcements of mergers and buyouts of both well-established independent and flagged offices in the 10-50 agent range.

Examples include Keyes’ acquisition of premier luxury brokerage Illustrated Properties and its 500 agents in July 2016. Keyes has continued with seven additional deals in the Miami-Dade-Broward-Palm Beach area totaling 300 additional agents. Illustrated Properties, run as an independent brand, made two of its own acquisitions in the past year, as well. Other suitors include well-known companies such as RelatedISG, Compass, Engel & Völkers, Century 21 JWC Florida Realty, Berkshire Hathaway HomeServices Florida Realty and Douglas Elliman.

As technology and IT security costs continue to rise and agents demand advanced customer relationship management (CRM) and mobile marketing platforms, size and scale are a must. This coupled with declining margins with larger commission splits going to high-performing internal teams, it has caused independent offices to seek out compatible merger partners.

What’s contributing to this consolidation trend?

Here’s the math: Take a 20-year old independent firm with 20 agents doing $30 million in gross sales. The broker is probably grossing $800,000-$900,000, assuming an 80-20 split with the agents, leaving approximately $200,000 to pay rent, insurance, utilities and administrative costs. If the owner isn’t a producer contributing significant sales, the brokerage won’t make money. As brokers reach their 50s and 60s, they are looking for an exit strategy and a way to remain competitive and profitable. Typical “fold-up” deals enable the independent to jettison the costs of running an office and focus on producing commissions. It also provides them with a stronger position to compete with emerging alternative online and virtual residential real estate marketing platforms with big venture capital and public market investments behind them.

IMG_Mike_Pappas_headshot_2_1_HC9SIN3G_L272541191 (1)
Mike Pappas is the president and CEO of The Keyes Company, an independent residential real estate firm.

Acquiring brokerages need to grow and target independents in a targeted geographic region or one with a strong performance in a particular market segment because it costs them less to acquire versus opening an office of their own and having to recruit agents from scratch.

According to a National Association of Realtors conference presentation on residential real estate mergers, “One must pursue a merger or acquisition with caution and proper due diligence. However, with the right set of circumstances — culture cohesion, solid leadership and management, flexible employees, deft market positioning, a copacetic economy — a merger or acquisition can be a sound decision.”

Another dynamic impacting the business of real estate has been the growth and influence of high-performing co-branded “teams” that benefit from the infrastructure, brand, marketing, technology and alternative services of a larger, well-known company. Today, these elite teams are positioned to generate millions in sales with a very high commission split, ranging from 85 to 95 percent.

With the average net profit on a home sale for a large brokerage in the hundreds of dollars — not thousands — it is necessary to find additional services to offer that enhance the marketing and sale of a home while contributing to the bottom line. Examples include mortgage brokerage, title insurance and homeowners insurance. Many companies find that offering all of these services under one roof facilitate a smoother sale and closing, also helping difficult deals happen due to close relationships and efficiency of communications and logistics for their real estate agents.

I have always believed that obtaining financing and home insurance quickly may be the difference between having a deal succeed or fail.

Clearly, some mergers succeed while others fail. One key to success is retaining the acquired firm’s best producers, because without them, what do you have? A deal that doesn’t work financially or from a reputation standpoint is not good for morale, credibility or profits.

Mike Pappas is the president and CEO of The Keyes Company, an independent residential real estate firm. With over 3,000 agents and 50-plus offices in Miami-Dade, Broward, Palm Beach, Martin, St. Lucie, and Volusia counties, the company generates more than $6 billion in annual revenue from its real estate service lines.

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