updated 8:00 p.m. ET Oct. 5, 2008
If cash is king, then you can courier that crown and scepter over to the Minneapolis headquarters of HomeServices of America Inc.
The nation’s second-largest real estate brokerage plans to spend $200 million over the next couple of years paying 20 to 25 cents on the dollar for distressed brokerages around the country. That capital, which will triple the company’s market presence, comes from the same source that last month invested $5 billion in the struggling Wall Street giant Goldman Sachs: Warren Buffett’s Berkshire Hathaway Inc.
“We are very proud to be part of Berkshire Hathaway and we believe the halo effect of being a Berkshire Hathaway company along with the presumed operating values and ethics put us in a different category” from other real estate brokerages, said HomeServices Chairman and CEO Ron Peltier. “We think the longer-term prospects for housing are very compelling, and we think it’s a perfect time to expand our position."
This isn’t a new strategy for HomeServices, which has already acquired its way into 24 of the biggest real estate markets in the country under 20 brand names. From its founding in 1988 through the first part of this decade, the company was acquiring brokerages at a rate of five or six per year. When the real estate market boomed, however, the annual pace slowed to one or two as brokerages got overvalued along with the houses they were selling.
“We’ve not made any significant acquisitions since 2006 because prices were too high,” Peltier said. “Our position was to hold pat until the prices start to normalize, and they’ve now reached that tipping point.”
The strategy will be to shore up operations in the markets where HomeServices already has a presence, Peltier said. Then the company will continue its geographical expansion, with the goal of eventually having brokerages in at least 60 of the largest real estate markets in the country.
“We’re about a third of the way toward our long-term goal,” said Peltier, who mentioned the Pacific Northwest, northern California, Phoenix, Chicago, Boston, Philadelphia and New York as markets the firm is eyeing. The company acquired Edina Realty Home Services in Edina in 1998.
HomeServices will only consider buying well-established, well-run real estate brokerages that have a proven track record, said Peltier, adding that he often gets calls from startups looking to sell. The average age of the brokerage acquired by HomeServices is about 55 years old.
“We’re looking for companies that have blood, sweat and tears invested in them,” Peltier said. “We’re not looking at companies that were speculative.”
Part of the reason for sticking to well-established, well-run brokerages is that HomeServices for the most part lets a company continue to run as it had before the acquisition, including keeping its name and leadership structure intact.
“From what I hear, [being bought by HomeServices of America] has very little impact on the agent in the field,” said Keith Holm, executive vice president of the St. Paul Area Association of Realtors. “They still go to work every day. It might add a little stability to their lives. Clearly, when the market is like what it is today, there are probably some brokerages that would be thrilled to death to sell to HomeServices.”
Rather than dismantling a company that it buys, HomeServices “builds them out,” said Peltier, meaning that it might add insurance or mortgage-title services to the existing company.
“It’s looked at in a very favorable way by the employees and brokers and agents because you have the advantage of the economics of scale,” said Tom Musil, director of the Shenehon Center for Real Estate at the University of St. Thomas. “Everybody wins. You’re taking a brokerage out of a distressed situation and enhancing the companies you’re acquiring.”
There are risks to the strategy, said Musil, mostly involving specific markets.
“Cities like Las Vegas, where properties rapidly inflate and deflate, those markets will be riskier than others like Oregon and Washington, which are more stable,” Musil said. “The Twin Cities is in the middle.”
HomeServices has suffered the effects of the housing downturn. Its pretax profit fell 71 percent last year from its high of $145 million in 2005. During the first seven months of 2008, the company’s pretax profit was $2 million.
But HomeServices has managed to remain profitable, unlike many in the real estate industry, Peltier said. And the market will inevitably turn back up, so it pays to be patient.
“We’re part of Berkshire Hathaway, and Warren Buffet keeps his companies forever,” Peltier said. “This is a long-term commitment and investment in the housing and real estate markets.”
homeservices of america inc.
CEO: Ron Peltier
Business: Real estate brokerage
Parent company: Berkshire Hathaway Inc., owned by Warren Buffett
Size: 375 branches in 19 states, employing 17,000 sales associates
Markets: Birmingham and Mobile, Ala.; central Alabama; Tucscon, Ariz.; southern Arizona; southern California and the central coast; southern Florida; Atlanta; southern Indiana tri-state area; Des Moines, Cedar Rapids, and Iowa City, Iowa; Kansas City, Kan.; Lexington, Ky.; northern and central Kentucky; Chesapeake Bay region and the eastern shore of Maryland; Minnesota; Springfield and Branson, Mo.; Lincoln and Omaha, Neb.; southeast and central Nebraska; central North Carolina; eastern North Dakota; Cincinnati; South Carolina; South Dakota; and western Wisconsin.
Minnesota presence: Edina Realty Home Services, Edina
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