Mergers sweep L.A. residential brokerage industry.

Smaller Westside firms being targeted for acquisition

The Southland's prolonged real estate recession has triggered a dramatic consolidation of the residential brokerage industry.

Some of the hottest acquisition activity has been on the Westside, mainly because of the aggressive expansionary activity from Beverly Hills-based Prudential California Realty.

In the first nine months of 1993, Prudential picked up Norton Realtors, a 40-agent firm in Brentwood; Marler & Associates, a 40-agent firm in Palos Verdes; and Petrick & Associates, a 50-agent firm in Pacific Palisades.

Rick Merrill, Prudential's chief executive officer, hinted that his company's acquisition binge on the Westside is far from over.

He said Prudential's strategy is to continue expanding "in affluent markets and adjacent areas while markets remain depressed."

Meanwhile, Jon Douglas Co., also based in Beverly Hills, acquired Kelleher and Associates, a 50-agent firm in Marina del Rey, in August. Jon Douglas also enlarged its Beverly Hills office by acquiring Mike Silverman & Associates Inc. and June Scott and Associates Inc., two Beverly Hills agencies which employed a dozen agents each.

All of Scott's agents and most of Silverman's agents were folded into Douglas' Beverly Hills office, said Douglas spokesman Tim Salinger.

Re/Max Beach Cities Realty is another residential brokerage that has been expanding on the Westside. The firm, a franchise operation, entered the Westside market four years ago and now has 65 agents there, said Bob Todd, who owns a total of five Re/Max offices with 280 agents in L.A. County.

Instead of taking over smaller companies, Todd said, his Re/Max franchise is expanding by enticing independent residential agents with its "generous" commission structure. Unlike most real estate agencies, which require agents to relinquish a portion of their commissions to the brokerage owners, Re/Max agents are allowed to keep all their commissions. Instead of a commission split, Re/Max agents must pay a monthly "management fee," ranging from $325 to $800 and up, based on the office's size and location.

Todd said probably 20 to 25 percent of his 280 agents in L.A. County came from dissolved agencies.

He said he anticipates his West L.A. office will grow from its existing 65 agents to 100 agents in the next six to eight months. He also said he expects Re/Max's Marina del Rey office, which opened in July, to nearly double from its existing 28 agents to 50 agents within a year.

Fred Sands Realtors, which has 25 company-owned offices in Los Angeles County, reported that it plans to fuel its growth through franchising.

The company recently opened franchises in Santa Ynez and Solvang and is working on a franchise in Orange County, said company President Fred Sands.

Sands said the company doesn't have a specific number of new franchise offices it intends to open. But it does plan to open all those franchise offices in upscale areas.

"We don't want to grow unless it's strategic," he said.

Instead of taking over smaller brokerages on the Westside, Sands said his company is supporting its Westside brokers by increasing advertising in the real estate section of the Los Angeles Times to seven pages, nearly double the four pages Sands had formerly run.

Smaller agencies are also jumping on the merger bandwagon.

Action Network Realty of La Mirada, formerly Realty World, plans to have 25 offices by 1998, up from five today, said Rick Kesseler, one of four partners in the new corporation.

Action Network Realty officially merged with Golden Network Realty, a 35-agent firm in La Mirada, and dropped its franchise agreement with Realty World/Action Realty on Sept. 10. The new merged entity has about 58 agents in its La Mirada office and 200 agents overall.

"With real estate commissions so high, the only way to make money is to be dominating," said Kesseler. "A middle-size office isn't going to make it any more."

He said a company with 10 to 30 agents simply cannot survive; it either has to have more than 50 agents or fewer than 10 agents.

The name of the game in real estate now is to pay the least amount of overhead per agent, said local agents and brokers.

Kesseler said his company has talked to the owner-broker of one local real estate franchise who is bringing in $8,000 to $9,000 a month in commissions himself, but has to pay half that amount in overhead.

As Kesseler pointed out, the owner would be better off working for another franchise and keeping the money himself.

Like many of the larger real estate agencies, Action Network's strategy is to "do a lot of absorbing," meaning growing by taking on disaffected independent agents, Kesseler said.

He said Action Network also plans to grow by going into an area, buying up several independent brokerage firms in that area, forming a new company to hold ownership of the firms and then arranging for Action Network to take a percentage ownership in the new company.

Unlike a national franchise, such as Century 21, which strives to be in every market, Kesseler said, Action Network wants to dominate southeast L.A. County -- the area bordering Orange County.

With a 50-50 mix between franchise operations and independents in the area, southeast L.A. County is ripe for mergers, Kesseler said.

As agencies continue getting bigger and bigger, the challenge for each agency will be to find a niche in which to differentiate itself, said Tom Motter, vice president of operations for Century 21's Pacific Division, which covers Southern California and Hawaii.