FOR MANAGERS—Best Practices

Is it time to go franchise?

Is the time ripe for you to join a franchise? The answer depends on your needs and predilection. But what’s certain is that you’ve never had more franchisors vying for your attention.

There are more than 20 regional and national franchises jockeying to offer the right mix of brand identity, broker services, and cost options to the small and midsize independent brokers who represent the bulk of real estate companies today.

Take Rich Motts, broker-owner of Motts, REALTORS®. A few times a year the third-generation Ohio broker gets a visit from a franchise representative. So far, Motts hasn’t bitten at affiliation, but he’s considering it.

Although his company has name recognition and market share—its roots go back almost 55 years in Canton, Ohio, and the company consistently commands between 5 percent and 10 percent of local sales annually—Motts is feeling the squeeze.

Like other small and midsized independent brokers, Motts’ bottom-line costs are going up while commission rates are shrinking. “In the last couple of years, the company dollar has gotten smaller,” he says.

Something for everyone?
To hear the franchises tell it, they have just what the Richard Mottses of the world need. (See page FM2 for information on services and costs of 21 of the country’s real estate franchises.)

“We want to offer brokers something that makes sense no matter how they operate,” says John Bearden, president and CEO of GMAC Home Services in Oak Brook, Ill.

What’s more, consumers, looking for ease and consistency in the services they consume, are driving a trend toward franchising, say franchising representatives, not just in real estate but in all industries.

“Consumers are looking for a recognized level of quality and consistent experience, and that’s hard for solo entrepreneurs to deliver,” says Richard LaRue, director of franchise relations for Realty Executives in Phoenix.

Views are mixed on whether residential real estate is in fact trending toward franchised companies, but one thing is clear. The industry today remains primarily a business of small local companies. As of 2001, the last year national statistics were compiled, roughly two-thirds of brokers and 60 percent of sales associates were affiliated with an independent, non-franchised company, according to NATIONAL ASSOCIATION OF REALTORS®’ data.

Those figures are up from 1996, when 63 percent of brokers and 57 percent of sales associates were affiliated with an independent company.

To be sure, there’ll always be brokerages for which affiliating with a franchise doesn’t make sense—in some cases, it’s simply because the owners resist any encroachment on their independence.

But, if you’re open to the idea, how do you decide which franchise to affiliate with? Franchise executives say it’s key to know what part of your operation—marketing, technology, administration—needs beefing up, how much you can afford, and whether the culture of the franchise makes a good match for you. That last point is something the franchise companies take seriously.

“We make sure the brokers who franchise with us have the same desire for quality services and customer relations and know how to run their businesses in the same manner as the other 1,600 offices in our network,” says Earl Lee, president of Prudential Real Estate Services in Irvine, Calif.

Coming in with money is essential, too, because affiliating with a franchise isn’t cheap.

“For me, the cost of becoming an affiliate is a major hurdle,” says Mike Teer, CRS®, broker-owner of Teer One Properties, a five-person brokerage in Riverside, Calif.

That cost entails more than just putting up the initial franchise fee, which can be as low as $4,500, or the ongoing royalty or per-transaction fee, which can total thousands of dollars a year. Many franchisors also require small brokers to show capital and liquidity strength to ensure that they have the wherewithal to survive in lean times.

“For one company, I needed to show $100,000 in actual assets and up to $50,000 in cash, on top of the $15,000 to $20,000 in franchise costs,” says Teer.

To help ease the cost constraint, many of the franchise companies offer financing arrangements to new affiliates. Details differ, but for many franchises, the assistance is limited to financing the initial franchise fee. Companies must still come to the table in a healthy capital position.

Show us the money
Given the amount of money that’s needed, it’s crucial that franchises offer tangible benefits in return. And for independents with deep roots in a community, benefits have to mean more than just the ability to hitch their name to a nationally known company.

For Motts, it means the chance to earn ancillary, or noncommission, income. “Franchises have to make a really clear case that the noncommission dollars I could get from ancillary services—which is something my company hasn’t focused on—are worth what they would be taking from my gross commission income,” he says.

For other independent brokers, the payoff they’re seeking from franchises could be entirely different—technology, training, a marketing plan—but a payoff there must be.

RealtorMag Online

For a look at the benefits of franchises and independents, click here.

Compare residential real estate franchises

Thinking of joining a franchise? Use this chart to help you evaluate 21 of the country’s options.

Key
A. Year began franchising
B. Number of sales associates and brokers
C. Number of offices
D. Franchise’s target areas
E. Franchise fee
F. Ongoing royalty fee
G. Renewal fee
H. Total investment
I. Term of agreement