A shift in Toronto's brokerage landscape
Real estate firms are partnering up or acquiring competitors to boost revenue streams
By SHANE DINGMAN
Friday, May 17, 2019 Print Edition, Page H4
TORONTO -- A wave of acquisitions has made some of the Toronto area's largest real estate brokerages even larger and the deal makers say to expect more consolidation in the future.
On April 10, independent brokerage Right at Home Realty Inc.
announced it had purchased Your Choice Realty, adding to its existing 4,500 sales representative workforce another 450 realtors and branches in Barrie, Ont., Burlington, Ont., Hamilton and Ottawa. On March 27, fellow indie brokerage iPro Realty Ltd.
announced the acquisition of three offices for Kingsway Real Estate Brokerage, which could add close to 600 agents. And just last week Peerage Realty announced it was buying Sotheby's International Realty Canada and its 540 realtors.
"Our goal is to spread Right at Home to every major city in Ontario," said Ron Peddicord, cofounder and chairman of Right at Home, who said the company also recruits between 300 and 475 agents a year. "We'll either do that through acquisition or a strategic partnership."
"Right now we have 12 locations and we're looking to open up 25 or 30," said iPro co-founder and CEO Rui Alves, who says iPro will have close to 1,700 agents after the Kingsway deal. "We're looking to have 5,000 to 6,000 agents in the [Greater Toronto Area]. That's the only way you can make any decent money these days. We're basically like McDonald's; we're making a couple cents per hamburger."
That's in part because there are only a few major revenue streams for brokerages: a share of the commission on home sales and whatever brokerage fees it collects from each agent.
But increasingly, brokerage fees are not the cash-cow they used to be. The days when the big franchise brands - Royal LePage, Century21, Re/Max, and the like - made a lucrative business off of desk fees or association fees appear to be running out.
"Agents paid way more money to brokerages than they do now," Mr. Alves said. "At Re/Max, 35 years ago, I was paying way more than $1,000 a month [for desk fees]. We've seen a huge decline in fees; now a typical Re/Max office, is down to $400-$500 a month."
Most of the independent brokerages, such as Right at Home and iPro, charge just $99 a month. But they make their money by having a lower cost base to manage more agents than a typical franchise brokerage used to be able to handle.
That has led to a consolidation into several mega-offices across the GTA. Mr. Alves estimates that by the end of 2018 there were more than 15 brokerages with more than 500 agents and 8 with more than 1,000; whereas when iPro went independent in 2010 there were only four 500-person brokerages and 2 with 1,000 agents.
"There will probably end up being just four or five large independents in the GTA," Mr. Alves said.
But merging two real estate brokerages is not like merging two factories or two accounting offices, Mr. Peddicord said. Real estate professionals are independent contractors and 90 per cent of the job of a merger is convincing them to stay with the new team instead of slipping away to other brokerages. The way these deals are typically structured is the broker is paid a per-head fee for every agent they can help sign to the new company, paid in installments over a period of time (for example, a separate fee once a year has passed without significant attrition).
A variety of factors might motivate a broker to sell, including everything from succession planning to simple cash crunch.
But Mr. Peddicord says the pressure on broker's bottom lines has been grinding more and more "middle-size" brokers in recent years.
"There's 1,500 brokerages in [the Toronto Real Estate Board], but only 300 of those did two deals or more a month," Mr. Peddicord said. "These smaller brokerages, they know they need new technology in today's market, but they don't have the capital to keep up."
In the case of Your Choice, which, similar to Right at Home, offered a 100-per-cent commission model (both brokerages were charging a flat fee for processing sale for an agent, as opposed to sharing a percentage of the commission) there's also an economy of scale problem.
"When people are running this 100-per-cent model, you can run it pretty well until you get to about 500 agents - the overhead takes a leap at about 500 agents - then you need another 500 agents to get profitability," Mr.Peddicord said. That's where Jan Wrobel, broker of record at Your Choice, ended up selling.
In the case of Kingsway, Mr.Alves didn't comment on the motivations of broker of record Akbar Zareh. The Real Estate Council of Ontario has issued a proposal to revoke Mr. Zareh's registration and both parties are waiting on a ruling from the Licence Appeal Tribunal in that case.
But mergers are not just happening at large scale places, even more boutique operations are finding it helpful to combine forces after a rough couple of years in GTA real estate.
In April, 2017, the 12-agent DeClute Real Estate and the 8-person Wright Sisters Group joined their small teams focusing on premium listings in Toronto's east-end to form Union Realty Inc.
"That was a lifesaver that we merged then," says Rochelle DeClute, broker of record. "We live in a blue-chip neighbourhood, but the Beach was hit. Not as hard [as some parts of the GTA], but unit sales were down and prices did drop. We felt a sense of responsibility to each other to prove our worth to each other and we were able to really do well in that market. When you're scared you work really hard."
The results speak for themselves, Ms. Declute said. "[In 2018] we captured 1.6 per cent of all sales in the GTA, our agents are .042 per cent of all agents.
Each averaged $18.5-million in sales [the average TREB realtor earned $480,000].
"We don't make money on desk fees or make money on franchise fees, we make a commitment to training and skill development. Our agents are producing."
Already in 2019, there have been three major deals involving brokerage firms in the Greater Toronto Area: Right at Home Realty Inc. purchased Your Choice Realty,iPro Realty Ltd. acquired Kingsway Real Estate Brokerage and Peerage Realty is set to buy Sotheby's International Realty Canada.