Real Big in Real Estate: With a hand in a quarter of all real estate transactions in the nation, Cendant Corp. is now a giant in the industry
Two years ago, Cendant Corp. took the Manhattan real estate market by storm when it bought the Corcoran Group, one of New York City's premier residential realty firms. Last year, the company swept through New England with the purchase of The DeWolfe Companies, another well-known regional real estate firm, and through Florida, where it bought giant Arvida Realty. Since its entry into the real estate business in 1995, Cendant has shown a voracious appetite for acquisitions, transforming itself into a real estate empire. The huge Manhattan-based conglomerate says it now has a hand in one out of every four residential real estate transactions across the nation. "I don't think people realize what's been amassed over a short period of time," said Larry Goebel, an Irvine, Calif.-based mergers and acquisitions specialist for Prudential Real Estate Affiliates, a major competitor of Cendant.
Despite its dominance, most homebuyers and sellers don't know the Cendant name, experts say. Cendant owns National Realty Trust Inc., known as NRT, a Parsippany, N.J.-based company with 950 offices and 50,000 real estate agents, including 50 offices and nearly 2,000 agents in the Long Island-New York City region. In the past five years, NRT has acquired 50 firms per year and now is more than twice the size of the next largest residential brokerage, Minneapolis-based HomeServices of America. NRT accounts for about 5 percent of the U.S. market, according to Real Trends, a Littleton, Colo.-based research company. Cendant is also the world's largest real estate franchiser, owning the licenses of Century 21, Coldwell Banker, ERA, Coldwell Banker Commercial and the Corcoran Group, with 206 offices and 5,540 agents in New York City and on Long Island. In addition, it has become a leading player in the mortgage business and has a title and settlement services arm as well. "People know our brands, but don't know us," said Robert Moles, who oversees Cendant's franchise group.
National franchise brands, including those owned by Cendant, also have been growing at a fast clip in recent years. They account for 51 percent of agent transactions, up from 22 percent in 1991, according to Real Trends. At Cendant, the number of agents using its franchisee firms (excluding NRT-owned firms) has increased by 10.5 percent since 2000, with sales volumes up 33 percent, according to Moles. Cendant's meteoric rise is part of an industry-wide consolidation, according to Steve Murray, co-editor of Real Trends. In 1991, the top 500 firms handled 16 percent of all agent-handled transactions; by the end of 2002 large companies such as NRT accounted for 29 percent. Murray says consolidation has made it increasingly hard for smaller real estate firms to compete against the big players. It has also created a market that offers fewer choices to consumers. At the same time, consolidation is helping consumers by driving down commissions. In the past 10 years, commission rates nationwide have fallen from 6.1 percent to 5.1 percent, Murray's research shows.
Cendant, a widely diversified company with more than $15 billion in revenue last year, has many operations tied to the travel industry, including car-rental firms Avis and Budget and lodging chains such as the Ramada Inn, Days Inn and Howard Johnson, as well as tax preparation franchises. Cendant entered the resident marketplace in 1995 when the company - still operating as HFS Inc. -bought the Century 21 Real Estate franchise. Shortly afterward, chief executive Henry Silverman bought the ERA franchise and Coldwell Banker Real Estate Group. But some of these franchise companies, such as Coldwell Banker, also owned some brokerage firms, so Silverman, in 1997, set up NRT to manage the corporate-owned companies. Today, Cendant, which was created by HFS' merger with the consumer service company CUC International, earns one-third of its revenue from its real estate services division. "The real estate division is driving the company's results," said Adam Rosner, an analyst at Manhattan-based Value Line. The travel sector has been weak as the economy slowed and the threat of terrorism has remained. But the residential real estate marketplace has been booming, Rosner said. Cendant's real estate brand managers all work on the second floor in the company's Parsippany office. "They compete with one another," Moles said. "They each have their own Web site and advertising campaigns."
Moles said that Century 21 caters to the immigrant market (through its Hispanic marketing) and to smaller firms; Coldwell Banker to firms that service the $1-million-plus urban marketplace; and ERA for firms seeking rapid growth but don't want to be confused with other branded firms of the same name in an area. Moles said that Cendant franchises provide brand awareness, education, an extensive network and training. In turn, each Cendant brand requires 6 percent of all commission checks to be paid to Cendant before the remainder is split between a broker-owner and an agent. Additionally, there is a national marketing fee that requires a fee of up to 2 percent to pay for national TV, radio and news placements. Should a firm take out local advertising, that firm pays the costs. Century 21, which got its start in rural communities, has 6,600 offices in 41 countries, including 4,100 in the United States. "We are the oldest franchise firm in the country," said Van Davis, brand manager for Century 21. The brand manager's aim is to lure independent real estate firms to join their franchise chain. But this is a competitive business, with Prudential Real Estate Affiliates, GMAC and RE/MAX also vying for the attention of independent firms.
Furthermore, some independent firms find the franchisee costs too high. "While a name is good, it's not worth it," said Keith White, the broker-owner of Brandon Realty Services Inc. in Jamaica. "We advertise in local papers, knock on doors." White said that the standard 6 percent commission is often dropping to 4 percent, so if he finds a buyer for a home his firm gets 2 percent. And should that 2 percent - which is split with an agent - be subject to franchise fees, there wouldn't be much left to pay his overhead and rent. But Emmett Laffey, the chief executive of a large Century 21 franchisee in New York City and Long Island, counters that with his affiliation, "You're tapped into a network of 6,000-plus offices." The franchise, which has three offices in Queens and 11 in Nassau County, offers agents special workshops provided by the headquarters office and has online training manuals for agents and owners. "The cost [of being a franchisee] is small potatoes for what you get," Laffey said. But Lawrence P. Finn Jr., chief executive of Northport-based Coach Realtors Inc., which has 400 agents, said, "The real estate business is a low-margin business." Finn said he prefers to advertise locally, rather than contribute to national media campaigns. And he said Coach networks with other firms around the country through conferences put on by RELO, a grouping of major independents around the nation.
Prudential's franchise system operates much like Cendant's. Since it started its first franchise system in 1988, its network has grown to about 1,600 offices and 43,000 agents. RE/MAX's franchise model, however, tries to lure experienced agents by dangling high commission splits - as much as 90 percent of the total commission. But there is a catch: Agents pay as much as $1,800 a month in administrative costs. RE/MAX has 3,200 offices, with about 66,000 agents, said Daryl Jesperson, chief executive of Colorado-based RE/MAX International. NRT's main strategy is to buy large companies that will put it in the No. 1 or No. 2 spot among firms in a given region. In most cases, NRT renames its acquisitions as a Coldwell Banker Residential Brokerage. (Coldwell Banker has owned many brokerage firms since it started franchising in 1982, while Century 21 is purely a franchise firm.) Once an acquisition is made, the newly acquired NRT firm will often buy smaller firms in its vicinity, Richard Smith, the head of Cendant's real estate division, said. Quentin Sammis, whose Huntington firm was bought by NRT earlier this year, said he was attracted to NRT by its access to capital, transaction platforms and training systems. He said the firm is likely to continue growing through acquisitions. But there are downsides to being owned by NRT, said some former independents who now work for NRT. Managers at these firms say they have had to adjust to being employees and having to call headquarters to get clearance on what they can or can't do, such as speak to the media.
But Pam Liebman, chief executive of the Corcoran Group, said that while getting clearance from the top may "go against the basic instinct of being an entrepreneur, the benefits far outweigh this." Liebman said that the Corcoran Group has benefited from NRT's referral network, as agents from all over the country have referred clients to her Manhattan operations. Liebman said that when Corcoran was acquired, it was doing $2.8 billion in sales; this year its goal is to do $5 billion. With competition growing among the big real estate companies, Smith predicts that industry consolidation will continue for the next five to 10 years. "They [NRT] are clearly the largest - but no one has a grip on the industry at this point," said Ronald Peltier, chief executive of HomeServices of America, an affiliate of Berkshire Hathaway, owned by billionaire Warren Buffett. Since 1998, HomeServices of America has amassed 20 brokerage firms in 16 states to become the No. 2 player in the industry, Peltier said. Smith says that despite the size of NRT's and Cendant's franchises, these real estate operations are just entry points for a variety of real estate services that offer convenience for the consumer - while adding much to the company's bottom line. Reflecting another trend sweeping the industry, Cendant offers mortgages and loan settlement services to its home buyers, as well as other consumers.
Last year, Cendant Mortgage closed $60 billion in loans, making it the 10th-largest U.S. mortgage lender, according to its chief executive, Terry Edwards. Cendant also has acquired approximately 20 title agencies, assembling them under the Cendant Settlement Services folder to sell title insurance to buyers and mortgage lenders in 31 states. More than one-third of Cendant's mortgage business comes in through the company's real estate offices, often through toll-free numbers that consumers can call to process mortgages with licensed loan officers. Cendant Mortgage also generates 65 percent of its loan business through "private labeling" - that is, providing mortgages to financial companies such as Merrill Lynch, American Express and Charles Schwab that then offer them to their clients under their own company name. Still, Cendant Mortgage has had its share of problems. For instance, it ran into trouble when a U.S. Department of Housing and Urban Development investigation found that between 1999 and 2001, 1,307 Federal Housing Administration-backed loans didn't follow HUD's rules. Edwards said that the problem emerged because of "growing pains" and has since been resolved with HUD.
Finally, Cendant, like Prudential and others, is making a strong push into the relocation marketplace. For a nominal fee, it relocates top executives and government officials but gets to promote its real estate agents and other services to these consumers. With such an array of services, it's no surprise that Cendant is among many real estate companies lobbying for the proposal laid out by HUD Secretary Mel Martinez regarding the bundling of real estate, banking and settlement services. Under HUD's proposal, home buyers shopping for a house could sign onto a package that would combine mortgage and closing costs, or settlement services for one competitively priced fee. While some real estate sectors, such as the title industry, oppose the bundling plan, saying it would squeeze their profits, Smith said the approach could save consumers weeks of time and as much as $500 per transaction. Experts say it's unclear whether HUD's proposal would be finalized this year or even next year, particularly in the midst of opposition during election seasons. But it's also unlikely that diversified real estate companies such as Cendant will soften their position. "You can walk into a Mercedes dealership and buy an expensive car in less than an hour," Smith says. "So why does it take months with real estate?"