Most brokers are feeling the crunch. Existing home sales are down, mortgage interest rates are up, and the economic uncertainty is palpable. Rather than belabor the kick in the teeth this industry is feeling, I’d like to bring attention to the other side of the coin that has some real estate brokers licking their chops.
During this time, we (RTC Consulting) have come to grips with various certainties prevalent in residential real estate. Perhaps one of the least appealing certainties is volatility. Real estate brokerage is definitely not for the faint of heart. While it can be wildly rewarding, it can be quite a roller coaster. Interestingly another certainty we’ve observed is the opportunistic posture that some firms embrace when it comes to the downside of volatility.
We get the pleasure of working with some of the best of the best brokers. Not just the industry stalwarts in major metros, but smaller firms that dominate the peripheral markets. And many of them view environments like we’re in as spectacular consolidation opportunities.
Not immune to downturns
Now don’t get me wrong, these growth-minded firms I’m referring to are not immune to downturns. Like nearly all firms, their revenues are down. Unlike many of their competitors, they don’t panic. As good operators they shore up expenses and do their best to preserve cash. They make sure their internal houses are in order before they go on the prowl.
These firms understand that volatility will shake out those brokers that are either ill-equipped, unprepared, or unwilling to go through what we expect to be a slow, grinding recovery coming off a sharp downturn. Some will make a run at larger acquisitions, but the sweet spot is the smaller firms that can be folded in without too much complexity. There will be a plethora of opportunities in the months and years to come.
By the numbers
Consider this: It’s estimated that there are currently about 125,000 brokerage firms in the United States. With the Realtor count close to 1.6 million, according to the National Association of REALTORS, that’s a mean average of 13 agents per firm. Interestingly, according to the RealTrends Brokerage Rankings, the nation’s top 500 firms account for nearly 600,000 of these Realtors. What this means is less than one half of one percent of the nation’s firms account for over one-third of the Realtor count.
Inversely, the other 124,500 firms account for 1.0 million Realtors, pushing the average down to eight agents per firm. Of course, there are thousands more firms that have well more than the average, so I think it’s safe to say, conservatively, that three-quarters of the nation’s firms have 10 agents or less.
The sweet spot
This sweet spot is tens of thousands of brokerage firms across the country, perhaps hundreds in your market. A good contingent of these smaller firms are lean, mean machines and they’ll just fine in a downturn, but many will not. Consider that for most of these firms, the owners still list and sell. In a weak market, many will seek to shift the operational burden of running a company to somebody else so they can focus on their own livelihood.
The opportunistic growth-minded brokers will seek to leverage this weakness, and in many cases the cost may not be too high. Whether tomorrow, six months from now, or two years from now, we expect a large contingent of these smaller firms will be looking for a good place to land.
For purchasers, it may be as easy as a roll-in. At worst, it will be an asset acquisition that will require only a small portion of the purchase price down, with the rest contingent on production. If your firm is growth minded, keep your feelers out there, as consolidation opportunities abound.
Scott Wright is a partner with RTC Consulting in Colorado.
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