There are many strategies for creating a successful residential brokerage and real estate services organization. There are just as many strategies that don’t result in such a firm being as strong or successful as it could be. Among the most successful strategies is what we refer to as the “Fortress Strategy.”
The Fortress Strategy postulates that, at least in the residential brokerage and related services business, it is better to build stronger market share in a concentrated, well-defined market than to expand horizontally across multiple metropolitan markets. Thus, staying close to home, developing market share and vertically integrating with related services generally results in a stronger, more durable business — at least in our industry.
Successful brokerages that use the fortress strategy
Some of the most successful brokerages of the last 40 years have deployed this strategy to great effect. Firms such as Berkshire Hathaway HomeServices Fox Roach, Edina Realty, Iowa Realty, RE/MAX of Reading, Dickson Realty, Carolina One Realty and a few others have succeeded greatly in this strategy. While each could have expanded easily to other metropolitan areas, they avoided the temptation to do so.
It is not that other large firms did not have success expanding to other metropolitan areas, it’s just that frequently they’ve never experienced the level of market share and profitability that they have their original home markets. The expansion outside of their home markets brought them growth, but at the cost of less efficient business metrics, including lower profit margins and less return on invested capital.
Why is this so?
It’s understood that success in the brokerage and related services business is highly related to the quality and skills of the leadership of the enterprise. RealTrends has produced numerous studies over the past 20 years, and they confirm that the most important factor in the success of real estate services firms is the quality of the leadership and management — not the business model or brand of the firm.
As we have clearly stated, the data for this conclusion does not rule out the importance of the brand or business model, but it does show that these factors do not explain the relative performance of various brokerage firms.
Given the importance of leadership and management, it follows that the shorter the geographical distance between the people of a realty business and their leaders; the more successful the firm will be. And, the performance of the firms we mention above, and many others, confirms this.
The strength of the leadership team that most influences the success of the enterprise.
How Edina Realty did it
Among the first examples of this strategy was led by Edina Realty in the late 1970s to 1980s. The leader of this effort at the time, Larry Davis, showed that staying home in the Minneapolis-St. Paul area was key to building a great realty services business. It also showed that as they grew, it was important to do so through expansion into contiguous markets even within the metropolitan area rather than jump over markets.
Edina expanded one market at a time in their metro area, and always sought to expand next door rather than move too far from their base.
BHHS Fox & Roach pursued a slightly different strategy through mergers and acquisitions within the Philadelphia and Wilmington, Delaware metro areas, but stayed home in doing so. At one point, Iowa Realty developed market share north of 50% doing the same thing in Des Moines before they moved anywhere else.
As leaders of today’s real estate brokerage and related services firms consider how to grow, important lessons can be learned from the outcomes of other leaders’ strategies.
Steve Murray is a senior advisor with RealTrends and a partner in RTC Consulting, a real estate mergers, acquisitions and valuation firm.
