The 'ownership' Factor

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Competing conventional brokers badmouthed the concept. When Stacy Burton left a conventional Atlanta agency to join Re/Max, his wife began getting anonymous phone calls at home. "I wouldn't say they were threatening," says Burton, "but they wouldn't leave their names, and they'd tell her, 'He's crazy,' and 'He'd better watch what he's doing.' It only egged me on."

Thinking at first that he could build a system of company-owned agencies, Liniger had opened eight offices by the end of the first year but recruited only 21 agents. Losses accumulated, generating several hundred thousand dollars of short-term, mostly trade, debt to suppliers and advertising media. A group of investors that he had counted on for capital pulled out when its suburban real-estate development ventures failed, victims of the 1973 OPEC oil embargo. It took him another full year to find 21 more agents, and more than three years before the roster topped 100.

In 1975, Liniger abandoned the company-owned office strategy and sold his first franchise to expand beyond Denver. But growth was still slow. He was making a mistake, Liniger finally realized. "I was targeting the wrong people." He'd been trying to persuade brokers with existing agencies to convert to Re/Max and getting very few sales. Eventually he figured out why. "They'd have to fire 80% of their agents, all but the top performers, to get the concept to work," he says, "and they weren't willing to do that." So Liniger shifted his focus to wooing other brokers' sales managers and top agents -- people ready to go out on their own. The results were dramatically better, and those kinds of people are still buying Re/Max franchises today.

Tenacity has its rewards. Early this year Re/Max moved into New York, the last major state to approve its franchise documents. It's already the number-two agency in Canada. What next? "All we want is half of the top 20% of the real-estate agents in the United States," Liniger says. That would be roughly 78,000 sales associates (and another 12,000 in Canada), which doesn't seem a completely outrageous goal. Century 21, with 75,000 full-time U.S. associates, is currently number one.

With success comes challenge, from inside or out. In what ways is Re/Max vulnerable? At least three threats exist: the real-estate market could take a dive; the competition could outmaneuver Liniger; or he could grow smug.

What if the market collapses and residential sales fall off by, say, a third?

Falling commission revenues would hit sales associates in their pockets, but how badly? The average non-Re/Max agent, who takes home only $14,475 now, would be living -- if you could call it that -- on just $9,650. On the other hand, two-thirds of the average Re/Max agent's $68,000 annual gross revenue is still $45,000. If her expenses hold at $1,200 a month, the agent has $31,000 to get by on. If she took her $45,000 in commissions to a 50-50 agency where the broker covers expenses, she'd take home only $22,500 -- no reason to leave Re/Max.

And logic suggests that it might not even come to that. If it's true that Re/Max agents are more experienced and better producers than the typical agent, they ought to outperform the market in a downturn. In the early 1980s, when mortgage rates topped 15% and residential sales declined, Liniger says the Re/Max market share per associate actually increased.

Up the line, Re/Max brokers and the franchisor itself are cushioned, but not isolated, from market shrinkage, since their revenues depend not on commissions but on the flat fees that agents pay. Only to the extent that in a market downturn agents either don't pay their bills or leave the company does Re/Max or the brokerages suffer. During the 1981-83 real-estate recession, Liniger says, they didn't write off any agents' management fees, but they sometimes stretched collection. And would a Re/Max agent want to leave?

Say the market really took a hit, falling by half. The Re/Max agent who stayed on would pay the same fees but generate just $34,000 in commission to cover them. Her net: $19,600. What if she moved to a 50-50 agency where expenses were covered by the broker? She gives half her $34,000 in commission to the broker and keeps $17,000 -- still no reason to leave Re/Max.

OK, so the market threat doesn't seem substantial. What about competition? From whom? Conventional agencies can never beat Re/Max in agent compensation. Suppose a sales associate in a conventional agency keeps half of the first $100,000 in commissions she generates and 80% of the excess. If she brought $200,000 into the agency, she would net $130,000 -- $50,000 plus $80,000. Not bad. But the Re/Max agent would keep $185,600 net of expenses, quite a bit better. Besides, the conventional broker can't afford to be too generous with his top agents, because it's their commissions that subsidize the agency's recruiting and training.

A large conventional-agency organization could always convert itself to the Re/Max format, but that hardly seems likely. It would have to shed too many people. And as for a start-up modeled on his own plan, Liniger says that could happen, but Re/Max enjoys a tremendous lead.

And that leaves smugness, the third threat. Take your market for granted, succumb to the arrogance of success, or mistreat the people you sell to, and you'll be supplanted no matter how clever your concept. So far, Liniger talks like a man who respects that truism.

"You have to be careful," he says, "of getting hardening of the attitudes, of thinking that yours is the only way. This year Gail and I went to the Re/Max Colorado state convention like we always do, but we decided not to stay. We'd been to so many, you know. We were driving home that night, and I thought, 'No, we can't do this.' I told Gail that somewhere there's another Dave and Gail, and they're out talking to their operating people while we're going home to sit on our butts. That's how companies fail. So the next day we drove back and rented a hotel room. . . . We're not to the point that we know it all yet."

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