Berky’s RE = Status Quo

Berkshire Hathaway has partnered with Brookfield to create Berkshire Hathaway HomeServices, a “new premium franchise brand”, according to their blog’s announcement.

They and others are claiming that it will be a real game-changer, with Prudential California Realty’s COO Leeann Iacino saying, “Berkshire Hathaway HomeServices passion for our industry will redefine the future of real estate and the American Dream”.

My thoughts:

  • Prudential Real Estate had agreed to quit using the Prudential name in a previous agreement, so they had to come up with something.  Berkshire had invested in PCR years ago, so they were already committed, and apparently the name ‘Berkshire Hathaway HomeServices’ was the best they could do.
  • The management team for Berkshire Hathaway HomeServices is the same group of guys from Prudential – all long-timers who are used to the status quo.  You can’t say that Prudential Real Estate has brought any new ground-breakers to the industry since their inception, and check their website here – it looks like every other real estate website.  In the ‘about’ section they are still touting “the Rock”, with no mention of Berkshire.  They, like other big franchises, enjoy the current system, and won’t rock the boat.
  • The partner Brookfield is in it for the relocation business, and while that sounds promising, all it means for agents is paying out a 30% referral fee to a faceless corporate behemoth in exchange for leads – and great agents don’t need the business bad enough to pay that much vig.
  • Warren Buffett is 82, and Charlie Munger is 88 – what happens when they are gone?  BH will still be a successful enterprise, but with significantly less star power.  Bershire Hathaway hasn’t brought a single innovation to the real estate business, so name recognition is their sole contribution…at least so far.

This isn’t a game-changer – it is a commitment to keeping the game the same.

In the end, the big loser is the consumer, whose only want and need is transparency and a fair balance of cost-for-services.  Instead, the franchise companies – all of them – will be peddling their name-brand recognition and hype to sucker in more consumers (and agents too) into believing that their company image helps to sell homes.

But selling real estate is an individual sport, and the quality of your agent is all that matters.

Haven’t you seen great agents that don’t work for a franchise, and lousy agents who do?  There is no guarantee or promise that you will get a great agent just because you called a big-name company.

The big franchises don’t make much money, if any, from their great agents – but they make a killing on the agents who only sell a handful of homes (or less) per year.   Why do you think they employ 53,000 agents?

Why do you think Buffett got into this racket?  It’s not to change it, it is to exploit it further.


Real Estate IPOs

When the commission war starts, how will these guys survive?  They are heavily in debt, and now that they are slaves to the shareholders they won’t be able to adjust.  Why do you think they IPO’d?

Hat tip to daytrip for sending this in:

Realogy  (NYSE: RLGY  ) dared to challenge the choppy IPO waters by going public today.

It’s winning.

Realogy may not ring a bell, but you may be familiar with many of its real estate services. This is the company behind Coldwell Banker, ERA, Century 21, Sotheby’s International Realty, and several other providers of real estate franchising, brokerage, relocation, and title services.

It’s been a well-received debut. Realogy was expecting to sell a whopping 40 million shares between $23 and $27 apiece. Underwriters were able to price the deal at the high end of that range last night, and that’s good news for Apollo Global Management, which took the company private in a leveraged buyout five years ago.

However, even $27 for Realogy wasn’t enough. The stock opened 22% higher at $32.85 this morning, moving even higher later in the day.

Realogy’s financials aren’t befitting of a hot IPO. Revenue clocked in flat last year at $4.1 billion and adjusted EBITDA declined by 11%.

For a company that generated 72% of its revenue last year from gross commission income, one would think that home prices inching higher this year and an inviting mortgage market given dirt cheap borrowing rates would be major growth catalysts.

Well, that is starting to play out this year, but perhaps not as vividly as housing bulls would expect. Revenue climbed 9% through the first six months of 2012, and adjusted EBITDA climbed 14%. However, Realogy is still posting losses, weighed down by the heavy interest expenses incurred given its highly leveraged ways. Today’s IPO will help Realogy pay down some of that burdensome debt, but this is still an offering that can quickly sour if interest rates start heading higher and the real estate resale market cools down.

Naturally, the market doesn’t see it that way. It has seen shares of leading homebuilders soar. It also only helps that dot-com real estate debutantes have also been scorching hot. Last month’s IPO of Trulia and last year’s public debut of Zillow have been winning deals at a time when many prolific Internet companies in areas outside of real estate have suffered. As a bonus, one of this year’s hottest stocks has been Ellie Mae. The mortgage industry software provider has seen its stock pop nearly fivefold this year on a boost in mortgage originations.

Realogy will bear watching, especially if the resale market stays hot. However, the market’s euphoric reaction to a company that has so much to prove — and so much red ink to shake — seems to suggest that the exuberance for fresh real estate plays may be problematically misplaced.


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