Section Definition + Intro
Franchising has had a huge impact on the residential real estate brokerage industry since emerging in the late 1960s. Century 21 Real Estate, ERA Real Estate, and Re/Max hit the scene in the early 1970s with their franchising systems and national ambitions, and within a decade had an outsized industry influence. For example, Century 21 went public in 1977 after growing its network to 3,300 franchisees in just six years.
A franchisor is a company that owns trademarks, products, intellectual property, and business systems and then licenses them as a package to an organization to operate as a franchisee in a certain predetermined location for agreed-upon fees. The franchise agreement between these two parties also outlines branding, co-marketing as well as franchisee obligations. Franchisors, however, are not legally or financially responsible for their franchisees.
Franchisors generally do not have an ownership stake in the real estate offices under their brand unless the franchisor themselves decide to own the brokerage and then sign a franchise agreement with themselves. Examples of the former include Re/Max and Keller Williams Realty; examples of the latter include Coldwell Banker and NRT under the Realogy umbrella and Berkshire Hathaway HomeServices under the HomeServices of America umbrella (these are then generally referred to as company-owned offices).
Franchising does not fundamentally alter brokerage operation. Primarily, franchisors provide brokers a brand and an operating system designed to help them grow and improve operations. Some franchisors offer technology, referral networks, and other features. All offer brand.
Typically, franchisors primarily serve their broker franchisees, which, then, in turn, serve agents. Some franchisors such as Re/Max collect fees directly from agents, however. Both franchisor and franchisee, of course, indirectly serve real estate consumers through the agents.
A franchisor derives its primary income from franchisees (brokerages) who pay an ongoing franchisee fee principally determined as a percentage of total sales. Typically, brokerages pay franchisors a licensing fee as a percentage of their top-line revenue.
Traditionally, this fee stands at approximately 6 percent, which then staggers down at predetermined revenue thresholds. Many franchisors also require brokerages to contribute to a national advertising fund, which can be specified as a percentage of top-line revenue.
A franchisee (the party receiving the licensing rights), as most brokerages, usually derives the bulk of its revenue by taking a cut of the commissions its agents receive when they help a consumer buy or sell a house. This is usually a percentage on a sliding scale but is increasingly becoming a fixed fee. Brokerages often have additional agents fees for technology and marketing.
The Franchisor Landscape
Franchisors, of course, differ. Some franchisors enforcing tighter operational guidelines and branding application while others have a more laissez-faire approach. Each franchisor has distinct business practices, so levels of support around products and service vary widely by brand.
In the residential real estate brokerage industry, conversion or brand franchise systems are significantly more prevalent than business format franchises.
Many food franchises such as McDonald’s and Subway operate as business format franchises, meaning that they provide franchisees a complete, comprehensive system to operate the business, market product and deliver service. Most real estate brokerages already have those systems in place; therefore, real estate franchisees typically just adopt trademarks, marketing programs, and client service standards and deliverables.
Franchisors + the Mega 1000
The Mega 1000 analyzed this segment of the residential real estate brokerage industry in detail when it launched in 2018, something that had not been done before.
The top 20 franchising brands collectively represent a significant amount of the total of the industry. In 2018 the numbers were:
- $1.374 trillion in annual sales volume
- 58 million in annual transaction sides
- 551,000 agents
While NAR’s 2019 Profile of Real Estate Firms states that only 11 percent of firms are franchised, companies in this group account for 63 percent of the nation’s sales volume and 45 percent of its agent count.