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How Housing Franchises Got Back on Their Feet

October 23, 2013
URL: http://www.entrepreneur.com/article/228391

Bill Redfern was hoping to launch his American invasion sometime in the mid-2000s. After becoming Canada's largest home-inspection franchise in just two years, his company, A Buyer's Choice Home Inspections, was eyeing the U.S. But in 2006, as Redfern saw the subprime loan crisis push millions of Americans into foreclosure, he reshuffled his playbook and turned elsewhere, developing his franchise in New Zealand, Chile, the Czech Republic and Slovakia.

It was a smart move. Between 2006 and 2010, U.S. homes on average lost close to 35 percent of their value. Some 4 million properties went through foreclosure proceedings. And the idea of homeownership as the cornerstone of the American dream? It fell hard.

In the franchise world, concepts that served homeowners or the business of residential real estate were also victims of the housing crisis: Movers, home inspectors, realtors, house flippers, painters, redecorators and dozens of ancillary service providers were all affected. Now that housing markets are creeping back to normalcy--new residential construction was up 24 percent in the first half of 2013, according to the U.S. Census Bureau, while existing home sales in June were up 15.2 percent from the year before, according to the National Association of Realtors--the franchises that serve them are getting back on their feet as well.

For Redfern, the positive numbers coming out of the U.S. finally convinced him to bring his concept south of the border last year. "When we saw some spark in the U.S. real-estate sector, we became increasingly confident," says Redfern, who moved to Florida to expand A Buyer's Choice, which now has 30 units in the U.S. "And we're starting to see that choice bear fruit. Our sales pipeline is really developing here."

For Lansing, Mich.-based moving company Two Men and A Truck, the housing crisis came as a shock. After more than 20 years in business, the company experienced its first revenue declines in 2008 and 2009, taking a hit of almost 10 percent over the two years. This was hard to swallow, but the company's executives decided to look to the downturn as an opportunity and spent millions of dollars improving their system.

"When the housing crisis hit, we could have put our head in the sand or we could deal with it," explains chief financial officer Jeff Wesley.

Between 2006 and 2010, some 4 million U.S. properties went through foreclosure proceedings.

24% increase in new residential construction in the first half of 2013.

35% increase in number of houses bought and sold in 2012 through homevestors of america. 2013 transactions are up 48 percent.

$5.5 billion value of property that real property management handles through 250 units in 45 states.

"We chose to get better. We improved our lead generation and marketing activities. We began to reach out to all segments, including businesses, apartment and condo renters, as well as homeowners."

Wesley likes to point out that during the crisis, Two Men didn't lose any units. One reason for this, he believes, is the close-knit structure of the franchise system. Instead of facing the crisis alone, franchisees were able to look to their company peers for advice and support.

"I like to think of our franchise system as a family, and that we are partners," Wesley says. "I think our relationship with the system and closeness helped us weather the storm. Each unit had unique issues depending on their demographics, and we were able to help them individually." Now Two Men is growing again, with almost 250 units in 36 states.

David Hicks, co-president of Home-Vestors of America, a franchise that buys and flips undervalued homes, is also seeing business rebound. Last year the number of houses bought and sold increased 35 percent, and this year's transactions are up 48 percent. Higher housing prices have led to revenue gains of 69 percent.

It's a big change from 2006 to 2009, when business collapsed. HomeVestors franchisees typically buy undervalued homes, fix them up and sell them on the open market. During the housing crisis they could snatch up dozens of houses for a song; the problem was, no one was buying them, and even worse, banks were no longer financing the transactions. In the last year, however, with housing inventory low, Hicks has sold 100 new franchise units.

"I think we're back to the real level of homeownership, maybe even below," Hicks explains. "With subprime we weren't at sustainable levels. It went up to 69 percent, then down to 62 percent. I think the right number is somewhere in the middle. I think it's getting back to normal. Families want a backyard. People always dream of homeownership."

Not everyone's business suffered with skyrocketing foreclosure rates. In fact, for Kirk McGary, CEO of Real Property Management--the country's largest such franchise, managing $5.5 billion worth of property through 250 units in 45 states--the dip in homeownership, which is at its lowest rate in nearly 18 years, has been a huge driver of growth. The company, which began franchising in 2004, was doing well before the housing crisis. But when the market tanked, business went bonkers. During the mortgage crisis, Real Property was overwhelmed with business as the rental market took off and banks needed someone to manage foreclosed properties.

"When the bubble came, we said, ‘It is time to expand full-throttle,'" McGary says. "We hired a lot of people and corporate staff and started franchises all over the country. And it hasn't slowed down. It has been one fast ride."

Now that foreclosures have slowed, the company is still riding high because of the rental boom; in fact, May was Real Property's busiest month to date. "For years we've had people out of work forced to live with their parents or grandparents, and kids coming out of college who have had to move back home," McGary says. "Now they're going out on their own, and they have to live somewhere. Rental rates have grown the last nine quarters. The future looks great for us."

Big investment funds are taking advantage of that trend by buying up properties. To manage the rentals, they turn to companies like Real Property, a cheaper alternative to hiring a full-time maintenance staff.

"I've been in the market for 26 years, and the mentality of younger folks has changed. They are more willing to rent apartments or condos or small homes," McGary explains. "I don't know if we've become a renter nation, but people are more willing to rent long term."

Five Star Painting was also able to increase market share during the housing crisis, though that's not true for all painting companies. "There was some attrition in the industry," explains Chad Jones, chief development officer for Spanish Fork, Utah-based Five Star.

"A lot of places put all their eggs in the new-home construction basket. When that dried up, they didn't have a leg to stand on."

Most Five Star franchisees, he says, were working on new homes and renovation projects. Though they lost contracts for new homes, they capitalized on business generated by existing homeowners who decided to refurbish rather than risk a move. At the same time, the corporate office implemented an online lead-generation strategy, capturing many customers through digital advertising.

The other factor that helped keep Five Star growing was its ability to offer credit. While banks were cracking down on home equity loans, Five Star was able to give customers access to cash. For all these reasons, same-store sales increased and corporate continued to sell new units during the housing crisis.

Now that housing starts are improving, Jones is seeing even more contracts for the company. And he doesn't think business for existing homes will slack off anytime soon.

"I think there's been a delay in a lot of home maintenance," he says. "A lot of the population didn't have those funds the last few years. Now that jobs are coming back, or they're getting bonuses or are able to get traditional credit again, they can afford to do maintenance like painting that they couldn't do a couple of years ago."

Of course there may be more bumps in the road. Some analysts are warning that investment and venture capital firms are creating a mini-bubble that will burst once they've bought up as many properties as they can manage to rent out.

But Hicks of HomeVestors is still bullish on ownership. "When I first got married, I bought a house when interest rates were in the teens," he says. "People always buy houses. History has shown there are always ups and downs. But the general trend is up."

Meanwhile, Redfern says it was simply timing that caused him to expand A Buyer's Choice overseas, rather than a reflection on the quality of the U.S. market. "We would have pushed into the U.S. economy in 2008 and 2009, but that would have been the worst time ever," he says. "There was no possibility we were going to write the U.S. off. Everyone needs a roof over their head. We were always 1,000 percent confident U.S. housing would come back."