Rick Ellis, Vice President Global Development, Realogy, walks you through what’s really driving M&A in today’s real estate market.
Perhaps more than ever, large brokerages are driving today’s real estate market. Here’s a fact that may surprise you: Almost half of the entire U.S. residential industry is conducted by approximately 1% of the brokerages. At the top? In 2020, the numbers showed Realogy Holdings Corp. with 15.3%. The next two are Keller Williams Realty with 10.4%, and RE/MAX with 7.9%. That’s more than 30% of the entire market right there. A year later, we are still seeing the same trend. You can find the latest data here.
When analyzing the real estate landscape in 2022, bigger is most certainly better. Which is why, for many real estate broker/owners, the opportunity to sell, merge, acquire companies, or even affiliate with a major industry player can be difficult to resist.
Time after time, it’s been proven to be both a powerful growth—and exit—strategy. Throughout the course of my career, I’ve seen countless successful real estate mergers and acquisitions. But at the same time, I’ve also seen thousands of promising deals crash and burn. Today, I’d like to walk you through the market factors that drive M&A activity in residential real estate brokerages. We’ll also discuss some of the all-too-human misjudgments that can end up torpedoing deals.
Key market factors driving residential mergers and acquisitions
- Slow organic growth in many local markets
Many broker/owners see periods of low inventory as a harbinger of things to come. Instead of investing more money into their brand, technology, recruitment and other needs, they see it as the ideal time to “take their chips off the table” and sell.
- Recruiting challenges which limit the opportunity to increase market share
Many logistical factors are involved in scaling growth. A big one is recruitment. When it becomes more difficult to recruit and retain top talent, many broker/owners decide not to invest their own capital, but instead look for outside funding needed to accelerate their growth scale.
- Competitive brokerage models that reduce a broker’s company dollar and profits
Many broker/owners serve as sales agents themselves. That means much of their income doesn’t come from being the CEO of a multi-million-dollar brokerage—it comes from their own commissions. This puts them in direct competition with the same agents they employ.
- Limited availability of growth funding for real estate brokerages
Most growth-oriented brokerages aspire to become market drivers with many focusing on becoming regional in size. This requires extensive capital investment, so they will need strong financial backing.
Those are just some of the key market factors driving M&A real estate space. There are others as well, including dominance of technology and economic uncertainty.
Of course, not all decisions are purely market-driven. The real estate market affords people plenty of opportunity to make bad decisions that are all too human. From runaway egos, to sloppy details, to too many cooks, let’s take a look at some of the fundamental ways our own behavior can destroy promising real estate deals.
The Top 5 Deal Killers
Real estate M&A deals happen all the time. Deals also fall apart all the time. There are numerous reasons why deals die, but consistently, I’ve seen five that head the list as the “top deal killers.”
NOTE: Before we start, you’ll probably notice that price doesn’t make the list. Why? Because that’s table stakes. If a brokerage doesn’t have enough income to cover operational expenses and debt service, that deal won’t get very far.
- Brokers are generally ego driven, having primarily risen through the ranks as successful agents to one day hanging out their own shingles. The force that has driven them to be successful is self-motivation. While this drive has served them well, it can be a detriment when it comes to successfully driving growth through mergers and acquisitions.
- Brokerage culture has emerged as one of the dominant barriers to a successful merging of companies. The culture is the operating environment of the brokerage and it is unique to your company. Often when companies come together, there will be different styles, business models, commission structures, deal sizes, average sale prices, and much more. Changes in any area may be a threat to the existing culture.
- Time. There are myriad reasons why transactions drag on – and when they do, deals often come crashing down. Here’s an example: I knew a broker who was distraught because the sale of his company had fallen through after more than two years of discussions. The transaction would have been life-changing, but he had not been in a hurry to close the deal because business was very good, and he was enjoying record revenues. Unfortunately, while the seller was stuffing his pockets with a little extra cash, the buyer got restless and bought another company in the market. Now they’re competitors.
- Documentation. Buyers will invest considerable time and resources understanding a brokerages’ business management documents, past and current financials, and all other aspects of the business. Few buyers today will invest in a business with poor record keeping and minimal or incomplete records. It is one of the easiest ways to chase off a great buyer.
- Legal & accounting opinions. The role of the advisors should be to protect their clients from what they don’t know and reduce the risk to an acceptable level so their clients can make informed business decisions. Where it can go off course is when the client has not sought proper advice in advance, especially regarding taxes; or when the advisors cease functioning in an advisory role and become the decision makers. A large multi-state brokerage company exec once grumbled to me, “I think our lawyers have killed more good deals than they’ve closed.”
What’s Next?
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*Please note this document was published prior to Realogy’s rebrand to Anywhere Real Estate Inc. on June 9, 2022.
Rick Ellis
Rick Ellis is a 30+ year industry expert in real estate growth through Mergers & Acquisitions, affiliation, corporate finance and high level recruiting. He assists luxury real estate firms in premium markets with their growth strategies and consults owners to increase their market share, sales, profits and business value.