Warren Buffett's Invisible Empire
For years, Warren E. Buffett has been selling us everything from Dairy Queen sundaes and Fruit of the Loom briefs to Benjamin Moore paint and skillets from The Pampered Chef, not to mention insurance, carpets, furniture, and lots else. Now, it turns out, the Oracle of Omaha has also been selling us our houses.
Since 2000, one corner of Buffett's Berkshire Hathaway Inc. (BRK ) empire has quietly built the nation's second-largest real estate brokerage operation. Minneapolis-based HomeServices of America Inc. -- a subsidiary of Berkshire-controlled Mid-American Energy Holdings -- now has 357 offices and more than 18,600 agents. Last year, annual revenue topped $1.75 billion, up 19%, on residential sales of $60 billion. Earnings rose 15%, to $130 million. Only Cendant Corp.'s (CD ) NRT Inc., which owns the Coldwell Banker and ERA chains, is bigger, with $205 billion in transactions and 999 offices. Despite its industry clout, HomeServices rates barely a mention in Berkshire's annual report. "If HomeServices doesn't earn 20%, it probably gets lost in the rounding at Berkshire Hathaway," says Steve Murray, editor of Real Trends, a trade publication.
To create this powerhouse, Chief Executive Ronald J. Peltier has taken a page from Buffett's own value-investing playbook. Peltier typically buys four to six real estate chains a year, and like Buffett, he won't buy just anything with a "for sale" sign. He seeks out the No. 1 or No. 2 player in a region, and the firm's management team must be willing to stick around and keep running the show. Neither is he willing to pay a premium for these businesses, a value orientation that no doubt makes his boss in Omaha proud.
One reason for HomeServices' low profile: Peltier usually doesn't re-brand the real estate firms he buys. Instead, he keeps the original name in most cases -- like Berkshire does. Today, HomeServices operates under 17 different names in 18 states. Parsippany (N.J.)-based NRT has quite a different strategy. NRT, which began snapping up local firms in 1997, operates almost entirely under its national brand names. Peltier believes local brands work especially well in real estate because the business is parochial. Although a national brand does have its advantages, say many industry insiders, a local one can be just as powerful. "Real estate is not a commodity like a stock, a tire, or a book," says Stefan Swanepoel, managing partner of consulting firm RealSure. "It's subject to the geographic area, the people, the nuances."
Despite its smaller size, HomeServices outperforms NRT in cross-selling related services. The company closed 204,000 home sales or purchases last year, compared with 498,000 for NRT. But HomeServices sold more extra services -- 186,700, vs. 182,900 for NRT, according to Real Trends. For example, 60% of HomeServices' customers use it for title insurance and other title services, while 20% or so sign up for mortgages.
HomeServices' one-stop-shopping approach began long before Buffett arrived. The 56-year-old Peltier, who spent two years as a charter high school teacher in Minneapolis before getting his real estate license, joined Edina Realty in 1977. The firm was a top real estate outfit in the area, and Peltier was soon instrumental in making it an industry pioneer. In 1983, it became one of the first to start offering mortgages. Three years later it added title services. But it wasn't until Peltier took the helm in 1992 that Edina began expanding beyond the Twin Cities. As he saw it, residential real estate brokerage was highly fragmented and needed consolidation.
So Peltier sought out a partner with deep pockets to help fund a buying binge. He found it in 1997 with Omaha-based MidAmerican. Later, he created HomeServices as a holding company for the local firms he was buying. When Buffett bought 80.5% of MidAmerican in 2000, HomeServices still had just $471 million in revenue. "Buffett clearly wasn't targeting us," says Peltier. "But he saw the wisdom of our strategy."
Peltier was ahead of the consolidation curve. In 1990, the top 500 firms accounted for 15% of home sales and purchases; today it's more like 30%. And with the U.S. still boasting more than 75,000 firms, several factors will keep pushing them together. The cost of crucial new technology -- such as Web sites -- is a heavy burden for smaller outfits, while Internet firms and other discounters are chipping away at the long-sacrosanct 6% commission on home sales.
So it's a buyer's market for HomeServices. Since Buffett arrived on the scene, Peltier has bought 20 firms. For the most part, he likes high-growth markets. Last year he moved into North Carolina, the fifth-fastest-growing state, by purchasing Prudential Carolinas Realty in April and Graham & Boles Properties Inc. in August. He's also sizing up New England, northern Florida, and the Pacific Northwest. The attraction for sellers: Not only can they usually keep the name -- sometimes it's their family's -- but also they retain much of their autonomy to decide on marketing, set commissions, and map out their strategy for growth. HomeServices' relationship with Berkshire Hathaway is similar: Peltier updates Buffett and other execs frequently, but he has leeway to execute his own plan.
There's plenty of upside to grouping all the local firms under one umbrella. High-technology costs can be cut by buying in bulk and spreading those costs over a larger operation. And while local offices may be pros at buying and selling homes, few are skilled at businesses such as mortgage, title, insurance, and escrow services. Adding such services can boost the bottom line tremendously. While the typical profit on brokering a house sale is just $300, other services such as titles and mortgages can yield as much as $500.
For all of HomeServices' success, the real estate business can be rocky, and Peltier faces his share of challenges. Arranging loans is getting harder because of the proliferation of mortgage brokers in recent years. In the late '90s, only 5% of house hunters walked into one of his offices armed with a mortgage. Now closer to 45% are prequalified.
Peltier's strategy may also get tested if national brands become much more important in real estate. Younger buyers are increasingly turning to the Internet to begin their search. So a firm such as Coldwell Banker with a comprehensive Web portal that it markets all over the country could put local brands at a disadvantage. "Today the consumer generally doesn't judge the company by the brand name," says Real Trends' Murray. "There is evidence that's going to change."
Of course, HomeServices has enjoyed a red-hot housing market for several years, and a slowdown could happen at any time. But industry watchers say that may favor established players such as his company because some of the upstarts of the go-go years may be forced to close up shop as business slips. Peltier also says there may be more bargains for a value-conscious acquirer such as Home-Services. Buffett echoed that sentiment at his annual Omaha confab in April. "If there is indeed some kind of a [real estate] bubble and it's pricked at some point, the net effect might be quite positive in terms of what we could do with our capital," he told shareholders. It seems that few can match Buffett as a real estate agent.
By Adrienne Carter in Minneapolis