Shaking Up the Industry

Shaking Up the Industry

By Janet Leiser

Senior Editor

At the Tampa headquarters of Home Discovery Real Estate Services Corp., telephones seem to ring constantly, cardboard file boxes fill nooks and crannies, and desks and employees crowd each other.

Fast growth is the goal: Company founder Steven Johnston plans to take his startup discount brokerage statewide by year's end and national within five years.

Within a couple weeks, the company will move to a bigger, fancier office at Interstate Corporate Park, more than doubling its space to 40,000 square feet. And revenue is projected to reach $15 million this year, he says.

Add to that, Johnston was just given an Enterprise Florida entrepreneurial award, selected as a finalist for Ernst & Young's 2005 Entrepreneur of the Year and named to Inman News' recent list of 100 most influential real estate people. Not bad for a business started five years ago in the kitchen of Johnston's Temple Terrace home.

Along the Gulf Coast and in South Florida, blue and yellow Home Discovery billboards blanket highways and television commercials air regularly on local 24-hour news channels. The company has a title company, Key Title; a mortgage company, Home Discovery Lending Corp.; and a brand new insurance agency, Equity Mutual Insurance Group. It will spend about $6 million on marketing this year, says Allen Jernigan, the company's marketing director.

Part of the budget pays for an in-house direct marketing program that prints and mails thousands of postcards weekly to homeowners in hopes of wooing them away from traditional real estate firms that charge 6% commissions.

"I don't like to call it discounted," Johnston says. "If you look at how house prices are going up, 6% is quite a bit of money. We're looking at it as you're paying a reasonable amount of money."

From Tampa, the company handles about 4,000 calls a day from all 12 of the counties in the Tampa Bay area and South Florida that Home Discovery now serves, Johnston says. Despite competitor complaints that Home Discovery is hard to reach, he says agents promptly answer calls seven days a week between 9 a.m. and 7 p.m.

Refi boom

About five years ago, Johnston, a 1995 University of South Florida graduate, started Johnston & Johnston Financial Services with his sister, Sybil, and college friend Rich Heruska.

They called homeowners, soliciting mortgage business.

Computers and telephones were set up around Johnston's house with wires crisscrossing the floor, Johnston says. Work was nonstop, seven days a week. Within a year, the firm had eight to 10 employees.

"It was the height of the refinance boom," Johnston says. "The same customers were refinancing their homes three times. We thought about having a real estate company with zero commission just to get mortgage leads. That's where we came up with the 2% to get the mortgage leads and title business."

His sister didn't stay with the company, but Heruska is now Home Discovery's vice president and chief operating officer.

Profits from the mortgage company, along with a capital infusion by Outback Steakhouse founder Chris Sullivan, have paid for Home Discovery's rapid expansion, Johnston says.

"We knew the refinance boom was going to end one day, so we figured we'd better dig our well right now," he says.

The brokerage, started about three years ago and then called Home Discovere, has been well received by home sellers, Johnston says.

He claims the company has about 5% of the market in the Tampa Bay area and South Florida. But a Trendgraphix report shows the company sold 847 homes, or less than 1%, of the 90,762 homes listed for sale in Hillsborough and Pinellas counties for the 12 months ended in July. Coldwell Banker is the leader in those counties with 12.9% market share. In Sarasota County, Michael Saunders & Co. is the leader with more than 20% of the market, according to Trendgraphix.

Johnston readily acknowledges the company's niche doesn't include multimillion-dollar homes. Firms that offer black-tie open houses with cheese and wine aren't Home Discovery's competitors.

"We look for the Internet savvy, the younger crowd, the older people down in Sarasota," he says. "We appeal to the masses that want to save money."

In the beginning, the firm had an inside agent and an outside agent who handled all business. "Now there are 30 positions handling the entire transaction from beginning to end," he says. "We're approaching 200 employees."

Other real estate agencies have criticized Home Discovery's service, and the Better Business Bureau of the West Coast of Florida has given the company an unsatisfactory rating because of customer complaints.

"Ever since day one they said we were going to fail," Johnston says of his competitors.

Not that Johnston offered other Realtors an olive branch.

From the beginning, the company's listings showed a mere $2 commission for the buyer's agent. That fee was a slap in the face to buyers' agents, who typically receive 3% commission. For a $200,000 house, that's $6,000 for the buyer's broker and agent.

"We put $2 on the MLS because we could," he says. "The idea was we were going to sell the houses directly to the buyers. If a Realtor was going to come in, they had to negotiate their commission."

Johnston kept what he says is the only $2 commission check ever paid by Home Discovery. The Realtor, who received the check, helped a friend buy one of the firm's listings. But he wasn't happy about his fee.

He returned the check with a handwritten message for Johnston: "You can stick your $2 where the sun never shines."

Fast growth

Johnston acknowledges the company experienced customer service problems earlier this year as growth surpassed expectations. "We had so much business it was hard to keep up," he says. "We did not expect the amount of volume that we got. It just exploded."

Now, he says, the company has over hired to keep up with its expansion.

He describes the company culture as high-energy. "They believe in what we're doing," Johnston says of his employees. "They believe in the cause. We're fighting a war. They know it. It's a true David and Goliath story."

In recent months, the company has hired more top performers as other mortgage and title companies downsized as the market slowed, he says, adding: "It's great for us. We were looking for these people all along."

Home Discovery employees, including Realtors, receive a salary, bonuses, health care, long- and short-term disability insurance, a 401K with 3% matching contributions and other benefits, he says. Outside agents are given a Chrysler, laptop with mobile Internet access and a cellular telephone.

Based on advice from Sullivan, who serves as Johnston's mentor as well as an investor, the company is refining its processes, trying to hire the right people and implementing a top-notch marketing program.

"If you look across the country, there are only a couple models like ours," he says. "I'd say we are the No. 1 low-commission model in the country."

Changes

Home Discovery agents now show their listings as well as those offered by other firms through multiple listing services. In the past, Home Discovery's sellers showed their own homes.

"Who knows their house the best?" Johnston says.

And the company is trying to assuage relations with other real estate firms. "We're trying to become more Realtor friendly," Johnston says.

The company's Web site, homediscovery.com, shows two prices: one for listings sold directly and another price, with an additional 2% markup, if sold by a Realtor with another firm.

If a homeowner doesn't use Home Discovery's title company, the company charges a 3% sales commission instead of 2%.

As far as Johnston is concerned, Home Discovery is paving the way for the real estate industry. "Tomorrow's Real Estate Solution ... Today!" is the company's slogan.

"The industry needs to change," he says. "It's time for change."

More for Less?

Home Discovery Real Estate Services may be taking the Tampa Bay area by storm, but discount brokerages aren't new to the real estate industry.

"They've been around forever," Michael Saunders, founder and CEO of Sarasota County's largest real estate company, says of discount firms. "In every industry, you have discounters."

Budge Huskey, president and chief operating officer of Coldwell Banker Residential Real Estate Inc.-Florida West, the market leader in Hillsborough and Pinellas counties, says consumers "always win if they have choices."

"We're all shoppers. We're all consumers," Huskey says. "If the product is the same and we can get it at a different location or company and get it for less, that's great."

But when it comes to real estate, he says, "there isn't such a thing as a like product. Every single transaction is different. You cannot define or measure the cost associated with a real estate transaction at the front end."

Saunders agrees. She says there are many issues, such as the replacement of a house's roof or air conditioner, that may arise during a deal that can affect the seller's bottom line. A sales commission is only part of the equation.

"I think savvy consumers make a decision it's the net that matters," Saunders says. "It's what they net at the end of the day and the kind of experience they had in between that matters."

Saunders says she has heard talk of disgruntled Home Discovery customers. "In transactions with Home Discovery, you often can't even find the agent," she says. "The broker who sells the property is doing the work of both sides to protect the consumer."

Home Discovery founder Steven Johnston says the company gives more for less, offering the same services as traditional firms. He contends much misinformation about his company is passed around.

"Our challenges are basically just letting the consumers know the things they hear from the Realtors out there aren't true," Johnston says.

Selling a home is usually one of the most important financial decisions a person makes, Saunders says.

"You need a full-service professional by your side guiding you, whether you're buying or selling," Saunders says. "It isn't just write the contract and pick up your commission check."

Huskey says: "Our objective is not simply to tell a seller we can sell your home. That's not the hard part. A quality broker can look a seller in the eye and say, 'We're going to sell your property to the right buyer at the best possible price to maximize the net proceeds.' Routinely we find that sellers will compromise the quality of their marketing and presentation for half a percentage point or point when a good real estate company could have more than made up that amount with a higher sale price or lower concession."