There are many ways to make a residential brokerage or real estate services company a success. There are many strategies that won’t make a firm as strong or as successful as they could be. The “Fortress Strategy” is one of the most successful strategies.
According to the Fortress Strategy, it is better for residential brokerage and related services to have a stronger market share in a well-defined market than to expand horizontally in multiple markets. In our industry, it is better to stay close to home, develop market share, and integrate vertically with related services.
Fortress strategy is a successful strategy for brokerages
This strategy has been used by some of the most successful brokerages over the past 40 years to great effect. This strategy has been a huge success for firms such as Berkshire Hathaway HomeServices Fox Roach and Edina Realty, Iowa Realty (RE/MAX of Reading), Dickson Realty, Carolina One Realty, Dickson Realty, Iowa Realty, RE/MAX of Reading and many others. Each could have easily expanded to other metropolitan areas but they chose not to.
It’s not that other large companies have not had success expanding into other metropolitan areas. The problem is that they rarely experience the same level of market share or profitability as their original home markets. They experienced growth outside their home markets, but with lower efficiency business metrics such as lower profit margins and lower returns on capital invested.
Why is this?
It is well-known that success in brokerage and related services is directly related to the leadership skills and quality of the company. RealTrends’ studies over the past two decades have shown that the most important factor for success in real estate services firms is not the brand or business model, but the quality of their leadership and management.
We have made it clear that the data used to draw this conclusion does not exclude the importance of the brand and business model. However, it does show how these factors are not responsible for the relative performance between brokerage firms.
Because leadership and management are so important, it makes sense that the greater the distance between the people and leaders of a realty company, the more successful they will be. This is evident in the performance of many other firms, including the ones we have mentioned.
The most important factor in the success of an enterprise is its leadership team.
How Edina Realty did this
Edina Realty, which was founded in the late 1970s and 1980s, was one of the first to use this strategy. Larry Davis, the leader of this effort, demonstrated that it was important to stay in the Minneapolis-St. Paul region to build a great realty service business. It was also clear that they should grow in contiguous markets within the metropolitan area, rather than jumping over them.
Edina expanded in one market at a given time in their metro area. They always looked for opportunities to expand near their base rather than moving too far away.
BHHS Fox & Rochech pursued a slightly different strategy by merging and buying businesses in the Philadelphia and Wilmington, Delaware metropolitan areas. However, they remained home in doing so. Iowa Realty had a market share of over 50% in Des Moines, and this was before they moved to any other place.
Leaders of today’s brokerage and related service firms can learn valuable lessons from other leaders’ strategies as they consider how to grow.
Steve Murray is a Senior Advisor with RealTrends. He is also a Partner in RTC Consulting, which specializes in real estate mergers, acquisitions, and valuation.