Realty Executives International mega franchise in turmoil – speculation looms

Realty Executives brand in turmoil?

Realty Executives International (REI) has been riddled with quiet troubles in recent years with little to no media attention or even knowledge by REI agents of the turmoil. Executives have been let go, headquarters have been dramatically downsized, a major REI office defected to KW, while others have stopped paying franchise fees.

International headquarters moves. Again.

REI is headquartered in Arizona and claims 10,000 agents across 600 franchises in 24 countries, with 10 new franchises signed recently. International headquarters moved in 2007 out of their multi-story corporate high rise and in 2009 moved in with a local franchisee. Our source says that in a letter to franchisee owners, REI noted that the move was because times were tough, therefore, they needed to have ears on the ground.

One franchise operator told AGBeat that they were not buying “ears on the ground” as REI’s reason for moving. The only word franchise operators received at this point was to send franchise fees to what the operator equated to a strip mall location, leaving room for franchisee speculation.

Major REI exodus

The REI brand was dealt a major blow in spring of 2010 when 13 year franchise owner Anthony Azar defected to Keller Williams overnight, allegedly taking REI executives by surprise. Azar left with most of his 375 Tucson agents while some chose to stay with REI. Azar said in a statement that research and other observations convinced him to make the transition and one of our sources said they believe this conversion to be a sign of things to come.

Where are all of the corporate executives?

In spring of 2010, after over 20 years with REI, Realty Executives Phoenix President John Foltz’s allegedly nasty departure from the company was indicative of how one of our sources feels is becoming the culture of REI. Before Foltz left, his title was changed and he was replaced as President by Dominic Scappaticci recruited from Sotheby’s.

REI President and CEO Rich Rector filed a lawsuit accusing Foltz of misappropriating corporate assets, Foltz countersued for libel, claiming REI failed to pay him and when he complained, they sued him and accused him of fraud. Franchisees, brokers and agents were aware of this battle as the continuing volley of lawsuits has been quite public.

But what most of REI agents were not aware of is the company letting go of a large number of executives in December 2010 which did not get the same press as the Foltz/Rector battle. One source says thirteen people were let go at corporate headquarters, nearly half of the executive team including the COO and CFO due to REI’s claim of budget problems, with claims that no one at corporate was offering answers to the agents and brokers in the field.

Blackout – “we’ll get back to you”

Public relations begins internally, with all parts of the body being prepared to handle any inquiries- be they from consumers or journalists. A source close to the corporation says the only notices being sent to brokers, agents or franchisee owners are good news emails with only mentions of positive news and no arming of franchisees to handle the bad news of executives getting cut or battles between leaders. Some franchisees believe that REI corporate has a black out of information, often stating that they “will get back to you” to their agents and brokers; sources say REI is refusing to address any negative speculation, leading some inside the network to believe the company is in real trouble and potentially incapable of handling the fallout.

Mega franchise locked out of offices

Bloggers went wild this April when multiple Phoenix REI agents arrived at their offices and were shocked that the doors were locked by the landlords. Realty Executives Phoenix is where roughly 10% of REI corporate executives hang their license, and the franchise’s filing for bankruptcy has made waves in the industry. The lockouts occurred when lease negotiations failed, but executives told press that they were surprised by any lockout, while our sources tell us that some franchisee owners knew the threat of a lockout loomed over them.

Because of the financial troubles of REI’s flagship franchise, they are no longer paying franchise fees which has deeply upset other franchise owners.

In response to Realty Executives Phoenix’s franchise fees allegedly no longer being paid, several franchisees have halted payments of their franchise fees in response. A source told us that “brokers are dropping like flies” and that some are planning on leaving as their franchise contract ends while others are rumored to be considering dropping the REI name and paying the contract breach fee.

The crux of the issue is that franchise owners and brokers are opting out and in their own small network discussing how to jump ship. Of the agents (not brokers) we spoke with, none were aware of anything going on which means agents across America could be in for a big surprise in the coming year as their franchise owners change gears.

Ousted executives start new franchise

REI boasts technology and a superior referral network, but one franchise owner we spoke with said they feel nickled and dimed by conventions, meetings and cost per head. Rather than tuck tail, several former REI executives that were ousted have banded together to form an alternative brokerage model that contrasts REI and is likely based on the feelings of the franchise owner who feels nickled and dimed.

The competitor is called Professionals Realty Group USA (PRG) which they brought over from Australia. The company’s President is Glenn Melton, ousted CEO of REI, and their Director of Member Services is Meghan Hartman, former Director of Franchise Growth at REI. Scott Hurlock is PRG’s SVP of Franchise Development, formerly REI’s VP of International Franchise Development, and Mark Vost is now PRG’s Executive VP Membership & Business Development and was ousted as a well known Regional Developer at REI. These four are just a few of the handful of former REI leaders now at PRG.

The group offers a twist on the flat fee brokerage model that gets away from the traditional real estate split. Although franchisees tell us there is bad blood, they say the PRG team is focusing on their growth and looking forward rather than backward. Given the series of lawsuits between Foltz and Rector, it is possible other lawsuits could be forthcoming, but we were unable to locate any currently filed suits and REI has not responded to our request for information or comment.

Portrait of a franchise in turmoil

Nasty legal brawls, ousting executives with no warning, franchisees not paying franchise fees, a corporation in a communications blackout with the largest franchise filing bankruptcy and agents arriving to locked offices does not indicate a franchise in good health. One of our sources says their biggest frustration is that no one is seeing what is going on at REI, no one is putting the pieces together, and people are just assuming that the isolated incident they might be aware of is a sign of a down economy, but from a macro perspective, this is indicative of a franchise in turmoil.