At this point in time, Berkshire Hathaway entering into the home brokerage arena just 14 years ago is practically an afterthought. Right now, Buffett’s company is actually staking its name on the business.
There are signs popping up all over the place, from the front lawns of New York to California and everything in between. These signs bear the name of the Berkshire Hathaway real estate franchise. It’s called Berkshire Hathaway HomeServices. The push coming from the Omaha, Nebraska-based company is so that Berkshire can extend its reach during the rebound of the United States housing market.
Buffett has had a tendency to invest in strong consumer brands for decades, including Dairy Queen and Geico. But a few of the companies have adapted the Berkshire Hathaway name. The brokerage firm is in the process of testing the Berkshire brand to see if it has a broad appeal. They are hoping to use it without harming the reputation of a company that exudes integrity and financial strength.
“It’s always been used as an investment brand,” said Stefan Swanepoel, a real estate trend author and consultant. The question is: Can you position it as a consumer brand?”
Buffett’s amazing track record speaks volumes. He turned a failing textile business in the mid-1960s into a $287 billion business through corporate takeovers and stock picks. This has turned him into an investing legend. The overall company now spans such industries as manufacturing, retail, insurance and energy.
Ron Peltier states that maintaining this reputation is his main concern. He’s responsible for the Berkshire Hathaway HomeServices rollout, and he is the CEO of the unit. The new brand is expected to help brokers sell more homes, and the franchise network allows thousands of individuals to work under the Berkshire Hathaway brand, a trusted name that the 83-year-old Buffett has spent decades cultivating.
An Innocent Strategy?
“It’s an innocent strategy until proven guilty,” stated Jeff Matthews, a shareholder of Berkshire Hathaway stock and author of many books about the company. “A bunch of bad actors could sully the brand.”
Last month, at a brokers’ open house, the Cabernet and white signs containing the Berkshire Hathaway HomeServices logo ushered potential buyers into a four bedroom home in Princeton, New Jersey. This residence is about a half a mile from the governor’s mansion, Drumthwacket.
The properties listing agent, Helen Sherman, mentioned once the event was through that the Berkshire Hathaway brand provides a sense of stability and confidence to the people. A sales associate, Catherine O’Connell, had a more succinct way of saying it. Buffett is “a big name drop,” she mentions, while standing next to a table filled with brie, grapes and pretzels.
Peltier has been seeking this exact type of recognition. Over the last few years, he has spent nearly $500 million on acquisitions, and in the process has built the second biggest independent home real estate brokerage in the United States of America.
During 2012, Peltier purchased a majority stake in a business venture that licensed the Prudential and Real Living brand names to over 500 brokerages. That provided a much-needed opportunity to create a national destination as much more real estate shopping moves on the Internet.
“The market was in the early stages of correcting,” said Peltier during a phone interview. “We saw the franchise network available and we were in need of a great brand to build this national network.”
These ambitions may have been lost on Buffett when he first acquired HomeServices in 2000. He received the company as part of the Berkshire Hathaway buyout of MidAmerican Energy Holdings, which is a gas and electric utility company.
Buffett has mentioned that he barely noticed the brokerage business during the time of this deal. However, since then, he has really pushed for the growth of this business. In 2013, during the first nine months, the company operating profit was $117 million. This is more than twice the operating profit of the year prior.
Focus on Housing
Buffett has focused on the housing market as one of his key investing areas. Some of the other Berkshire Hathaway subsidiaries include paint, brick and carpet companies, such as: Seller of manufactured and modular homes – Clayton Homes; and Johns Manville, an insulation maker. Berkshire Hathaway even owns over $20 billion worth of stock in the United States’ largest mortgage lender, Wells Fargo & Co.
Buffett has not always had the ability to perfectly time the housing market. Back in February 2011, he predicted that the market would rebound in a year or so. He later called this prediction “dead wrong.”
Since that time, the housing market has rebounded as lower inventory began to spur new construction and push up the prices. Buffett has often spoken about his commitment in investing in one of the main driving forces of the United States economy.
At Berkshire Hathaway HomeServices, that equates to takeovers. Peltier has been looking to buy, as his largest competitor, Realogy Holdings Corp. – current owner of Caldwell Banker and Century 21 brands – works in order to service its debt from a leveraged buyout in 2007 by Apollo Global Management LLC. Over the last two years, he has bought eight brokerages from Seattle to Philadelphia.
Adding More Brokerages
The additional deals have helped HomeServices build their agent force to over 22,000 people, which is a 50% gain in staff. Last year, the Berkshire Hathaway brokerages were a part of $55 billion worth of home sales. This is $42 billion worth more than they participated in during 2012.
Even with the incredible growth, the industry can certainly consolidate more, we learned from president of Real Trends Inc., Steve Murray. He believes that the NRT and HomeServices brokerages, only account for about 5% of the US closed transactions. Competitors feel solace as HomeServices expands.
“Nobody’s worrying a whole lot,” Murray said. He was an advisor to brokerages that sold to HomeServices. “We’re still such a fragmented industry.”
Berkshire Hathaway’s major competitor, Realogy, has also been buying. It made four smaller acquisitions during the third quarter, as well as adding another brokerage in the Northern California area this past October. The brokerage does $1.8 5 billion in annual sales volume.
The Franchise Business
Berkshire Hathaway HomeServices still has plenty of room to grow the franchise business. According to Murray’s estimates, RE/MAX’s network in the United States of America actually does over twice the number of Peltier’s.
Richard Smith, CEO of Realogy, says that Peltier affirmed his approach to the business. The HomeServices deals offer a similar structure to his company, meaning that one part is licensing brands and the other part owns brokerages.
“It’s nice to see smart money trying to replicate what we’ve built over the past 20-some years,” said Smith on a conference call in November 2012.
Gerri Grassi, BHHS Fox & Roach broker manager in Princeton shared one way that the Omaha culture has extended into her office. Shortly before the rebranding, she received a pamphlet containing Buffett’s photo. It exhorted workers to act ethically, and it told workers to report anything that could compromise the reputation of the business.
It’s still open to question whether this message is a successful deterrent. Peltier also said that each network franchise will not necessarily have access to the new brand. By the end of last year, 18 had adopted it. He also sees Berkshire Hathaway HomeServices future expanding beyond the United States borders.
“We clearly see Western Europe, we see Asia and we see South America” as places where the company would expand. “We will take this business to the key international markets.”