Fairfax, Va. -- Two years ago, when P. Wesley Foster sent a recruiter to sniff out the prospects of buying the Bethesda-based realty chain Lewis & Silverman, the recruiter was told, "No way."
But this year, amid a sluggish housing market, the story was entirely different. A Lewis & Silverman executive approached Mr. Foster, the president of Virginia-based Long & Foster, with an overture to sell. The deal was quickly consummated.
"In good times, you can't acquire many people because they're doing too well to sell. The opposite is true in a recession," says the avuncular 58-year-old co-founder of Long & Foster, the nation's third-largest residential realty chain. During the 2-year-old market slump, Mr. Foster's company has made 15 acquisitions -- many of them desperation deals.
By gobbling up small, independent firms that were in trouble -- and successful firms whose owners wanted to sell -- Long & Foster has increased its reach into its key markets of Baltimore, Washington and Norfolk, Va. Since the real estate slump began, the number of Long & Foster agents has increased from 5,300 to 6,000.
In the Baltimore area, venerable O'Conor, Piper & Flynn, whose roots go back to the 1920s in Baltimore, still is the leading residential real estate broker. But Long & Foster is a hard-charging No. 2 (it ranks first in the Washington area and second in Norfolk).
Long & Foster says its Baltimore-area sales volume reached $105 million in July, compared to $106 million for O'Conor, Piper & Flynn. During April, Long & Foster topped its rival in Baltimore-area sales, Mr. Foster says. And he says his firm consistently leads in fast-growing Howard and Anne Arundel counties.
Still, executives at O'Conor, Piper & Flynn, based in Timonium, are unruffled.
"We're not interested in a big numbers game. We're interested in quality of service," says John Evans, O'Conor, Piper & Flynn's general sales manager for residential properties.
Mr. Evans says the real key to a realty firm's success is not its size (Long & Foster has 130 residential offices to O'Conor, Piper & Flynn's 34) but the productivity of its agents. He notes that the average O'Conor, Piper & Flynn agent made 10.3 home sales last year, compared with 5.9 for the average Long & Foster agent, according to statistics from REAL Trends, the trade industry magazine.
"I don't see Long & Foster as a threat," says Mr. Evans, who is convinced that Long & Foster's growth in the Baltimore region comes at the expense of firms other than O'Conor, Piper & Flynn. "I see it more as a competitor, and I think competition is good. Wes Foster's focus is not on the Baltimore region. We're locally owned, and our central focus is here."
Ambitious Long & Foster hasn't been immune to the recession's impact. When home sales plummeted in November 1990, Mr. Foster took drastic measures. He cut his own salary to zero and insisted that executives accept 10 percent pay cuts.
In addition, he demanded that all managers submit contingency plans that would cut overhead as much as 25 percent. As the recession worsened, such cuts drove down the firm's overhead to $4 million a month from $5 million. Long & Foster went so far as to cancel the service that waters plants at its offices -- and many plants died, laments Mr. Foster, whose grandfathers were farmers in Georgia.
After home sales started picking up, Long & Foster executives were paid back for the salary cuts they missed. (Mr. Foster declines to say what he receives in his own pay envelope, noting that the company is private.)
But Mr. Foster's preoccupation with cost control continues. One copy of the "red book" -- the thick computer printout under red plastic covers that is the company's profit and loss statement -- is kept at his McLean, Va., home.
"I run scared every day to make sure we always run a profit," says Mr. Foster. Although not every office is making money, the company has never gone into the red, he says.
In its best year, 1989, Long & Foster sold 40,000 homes worth a total of $6.4 billion. Despite the expansion of its network, volume dropped to 35,000 homes, worth a total of $5.3 billion, in 1990. Last year, Long & Foster sold 40,000 homes worth $6.3 billion.
This year, the company forecasts sales of 46,000 houses worth a total of $7.3 billion, says George T. Eastment III, Long & Foster's senior vice president.
But volume figures don't tell all. With high-performing agents demanding more and more of the commission dollar, there is intense pressure on profits. Long & Foster doesn't give out net income figures, but Mr. Eastment acknowledges that the company makes $40 to $50 on each property sold, compared with $100 in the best of times.
Pressure on commissions has been driven by the rise of the RE/MAX Realty chain in the Baltimore-Washington market. Rather than splitting commissions with agents -- as realty offices traditionally do -- RE/MAX charges agents for office space, phone service and some advertising, while allowing them to keep the entire commission. Since the "100 percent" plan helps successful agents, many have been drawn away from traditional firms such as Long & Foster.
After losing some agents to this phenomenon, Mr. Foster created a "100 percent plan" for Long & Foster agents last year -- even though that cut the company's profits from those agents. "Otherwise, I think RE/MAX would have continued to pick us apart, as it's picked apart our competitors," he says.
Keeping agents happy also is a challenge facing Long & Foster in its acquisition binge. Rumors of a pending takeover at a small real estate company can prompt agents to bolt before the deal is made final.
Long & Foster goes to great lengths to keep its acquisition plans secret until it can make its pitch to the agents, Mr. Eastment says. Once a merger candidate is spotted, Long & Foster executives have been known to schedule middle-of-the-night meetings at a realty office or to conduct merger talks in parked cars.
"We'll meet anyone, anywhere, any time, anyplace," Mr. Eastment says.
Meanwhile, Long & Foster is careful not to give away the store. In buying other firms, it usually makes a lump-sum advance on future royalty payments, which are based on a percentage of the commissions made by agents at the new offices. In some cases, it also buys the target firm's office equipment and furniture.
That strategy has allowed Long & Foster to make substantial acquisitions and to build market share for relatively little money. By buying the Lewis & Silverman chain, for example, Long & Foster increased its share of the Washington-area new-home brokerage market to 80 percent from 40 percent and acquired five general brokerage offices. To make the acquisition, it advanced about $200,000 on the five-year royalty plan.
Today, Mr. Foster's goal remains the same: to win a bigger share of the Washington, Baltimore and Norfolk markets. A sluggish market is frustrating. "It's like pulling teeth to get people to move," he says.
But he is convinced that there are plenty of opportunities to grow. "We can live with this market," he says.
A growing concern
Real estate companies acquired by Long & Foster in recent years.
May....... NVRealty ...... ....... .......Montgomery County
June...... Begg.... ...... ....... .......Washington, D.C.
October... Frazee/Better Homes & Gardens..Gaithersburg
November.. Anderson-Stokes ....... .......Eastern Shore/Del.
.......... Best Realty ... ....... .......Columbia
.......... ERA Homestead.. ....... .......Northern Va.
December.. Urban Properties....... .......Columbia
February.. Ralph Brown/Better Homes.......Frederick
.......... San-Piper/Century-21... .......Frederick
March..... Central Realty......... .......Columbia
April..... Larasan Realty......... .......Virginia Beach, Va.
.......... Randall Realty......... .......Glen Burnie
July...... AHM..... ...... ....... .......Salisbury
September. Machat Realty.. ....... .......Hagerstown
October... Professional... ....... .......Virginia Beach, Va.
April..... Betty McIntosh ....... Frederick
.......... William H. Norris..... Chestertown
June...... Lewis and Silverman... Bethesda
.......... Monocacy Valley Realty Frederick
July...... McKee Realty ......... Bowie
.......... Country Heritage...... Shepherdstown, W.Va.