Small- to midsized real estate firms forced to merge, close in downturn

January 13, 1991|By Los Angeles Daily News

LOS ANGELES -- As profits from commissions continue to decline, a wave of small- to medium-sized real estate firms are opting to merge or sell out.

The consolidation was expected by experts, who say the boom years in 1987 and 1988 caused many companies to over-expand in order to compete. When the market began retrenching, some of those firms did not have enough capital to last out a slow market.

"It is really the professionalizing of an industry that had it too easy for too long," said Sanford Goodkin, executive director of the KPMG Peat Marwick/ Goodkin Real Estate Consulting Group.

Mr. Goodkin said that about 70 percent of the real estate firms in Southern California "are in trouble" and many may decide to merge in order to boost their capital base.

The only other option would be downsizing, he said. Mr. Goodkin expects the real estate industry to shrink by 90 percent in 1991 from its peak employment level in 1988.

Some have been forced to abandon the fight. The most prominent was Mike Glickman Realty, which shut down last June after Mr. Glickman's personal and corporate bankruptcy filing.

And just three weeks ago, three franchise offices of Realty World Inc. in Newhall, Palmdale and Canyon Country were closed. The communities are north of Los Angeles.

"You can be a top-producing company, but if you don't run it efficiently [and] it comes down to the monthly net, there's nothing there," said Karen Betancourt, general manager of Century 21 Village Oaks Realty in the Los Angeles suburb of Thousand Oaks.

Century 21 Ambassador of Thousand Oaks was merged into VillageOaks earlier this month in order to combine the assets of the company and lower overhead costs between 20 and 30 percent, Ms. Betancourt said.

It goes beyond streamlining administrative costs. Since the 1960s, the portion of agents' sales commissions that brokers receive has declined from 60 percent to 20 percent, said Roger Hance, president of R. R. Gable Inc. of Northridge, a Los Angeles suburb. Meanwhile, many expenses have tripled.

Real estate agents agree to give a percentage of their commission to the real estate company in exchange for a work space and use of the company name.

In the boom years, agents could negotiate higher commission splits because of competition for top producing agents.

"The business has been led away from client service into competing for sales agents," Mr. Hance said.

That trend is now in reverse. Having a lot of agents is no longer enough to keep profits high.

In the last two months, for instance, about 300 Jon Douglas Co. agents have been laid off.

Jon Douglas, president of the firm, said that he had to make cuts when sales fell 17 percent between August and November.

The key to today's market is finding buyers.

Mr. Hance has developed a $1.5 million computer system that allows his agents to locate information on any house for sale within seconds -- even those listed with another company. He said potential buyers who call in can be lost while agents search for information.

Mr. Hance said the computer has made his firm an attractive partner for smaller brokerages that are interested in joint ventures.

The firms want to cut costs and improve their services to clients without sacrificing agents or going out of business, he said.

Mr. Hance has absorbed three companies in the Los Angeles suburban areas of Simi Valley, the Santa Clarita Valley and Woodland Hills so far this year and has several other joint ventures in the works that should be completed before spring 1991, he said.

Jim Savage, former president of Better Homes and Gardens Realty in Woodland Hills, said that merging with R. R. Gable solved the company's financial problems, which included having a long-term lease for too large an office.

When R. R. Gable became a partner in the firm, its Woodland Hills office, with 30 agents, moved into the Better Homes office, with 20 agents.

"It's combining the forces and cutting the overhead. We can share advertising and have bigger ads and that's cheaper," said Mr. Savage, whose sales volume was off 35 percent this year from 1989.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.