Aaroe’s Strategy for Success Included a Surprise Sale

Beverly Hills real estate agent John Aaroe could not have picked a worse time to start a new brokerage when he set up shop in early 1994.

Southern California’s real estate market was stuck in a deep slump and scores of small- and medium-size firms had failed, as giant brokers gobbled up what sales remained. Making matters worse, Aaroe opened his new office on the same day as the devastating Northridge earthquake.

Despite such bleak conditions, John Aaroe & Associates mushroomed into the third-largest real estate firm in Los Angeles--behind Coldwell Banker Jon Douglas and Fred Sands. Last year, the firm sold about $1.2 billion worth of real estate. In some neighborhoods, Aaroe’s 250-agent company controls 40% of all sales, he claims.

Earlier this month, Aaroe and his business partner, Alan Field, surprised many in the industry by selling ownership control of their young company to a San Diego-based franchisee of California Prudential Realty. Aaroe and Field will remain in charge of Prudential John Aaroe & Associates as managing partners.

The rapid expansion of Aaroe’s firm did not surprise many in the industry who know him.

“John . . . saw an opportunity and took advantage of it,” said Mike Silvas, former president of Dilbeck Realtors, which sells homes in the San Gabriel and San Fernando valleys.

Aaroe’s expansion--primarily in neighborhoods stretching west of downtown Los Angeles to the coast--and the sale of his firm is part of a shake-up in the real estate business.

Jon Douglas, for example, merged with Prudential Real Estate and then was acquired by Coldwell Banker. Large numbers of agents have broken ranks with established companies to join the new firms--like Aaroe’s--that promoted themselves as more entrepreneurial and personal than larger corporate rivals.

“John’s pizazz and charm count for a lot,” said agent Shirley Wells, who signed up with Aaroe’s firm after more than 10 years with Jon Douglas. “When he decided to [form] his own company, I immediately said to him, ‘When are we leaving?’ ”

But the real estate business is treacherous territory that has humbled many ambitious newcomers. It would have been hard for any firm to lose money earlier this year when a buying frenzy swept many Southern California communities. But how will those same brokers and agents fare as the market slows down in the face of a slower-growing economy?

During the late 1980s, for example, San Fernando Valley real estate wonder kid Mike Glickman zoomed to prominence only to watch his firm of 1,800 agents collapse into bankruptcy in 1990 as the real estate boom went bust.

In contrast, Aaroe--a 20-year industry veteran who survived the real estate bust of the early 1990s--has pursued a more disciplined strategy.

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Company Caters To Upscale Clients

He has focused on catering primarily to upscale city dwellers with a staff of polished, experienced agents recruited from rival firms. In fewer than five years, the firm has been able to win over many high-profile clients and prestigious listings from Los Feliz to Santa Monica.

Earlier this year, for example, Aaroe beat out competing brokers to list the Holmby Hills estate of the late Walt and Lillian Disney. The 5,000-square-foot house sold for close to its asking price of $8.9 million.

“I heard that there was no place for a new company,” said Aaroe in an interview in his Beverly Hills office. “But the consumer and agents . . . don’t necessarily all want to be dealt with by one large, generic [real estate] company.”

When Aaroe, a Palm Springs native, graduated from USC in the mid-1970s, he went directly to work selling homes for Jon Douglas.

In less than two months on the job, Aaroe had his first sale, a $250,000 house in the flats of Beverly Hills.

“It was entrepreneurial and there was no ceiling,” said Aaroe of his early experience selling real estate. “The harder you work, the more rewards you receive.”

In a business in which some agents rely on fast talk and high pressure to sell homes, Aaroe stood out with a suave and sophisticated manner that earned him the trust of wealthy clients. In his peak years, Aaroe sold nearly $50 million worth of property.

“He’s got great people skills,” said Joe Babijon, who directs the estates sales division of rival broker Fred Sands. “You have to be a person in which [wealthy] individuals . . . have a high level of trust.”

Aaroe worked his way up to the position of vice president and general sales manager for Jon Douglas. He also established Jon Douglas’ estate division, which focused exclusively on high-priced properties and lavish mansions.

But Aaroe, and another agent, Alan Field, decided to leave Jon Douglas as the once small, privately owned firm grew larger and agents began to grumble about an increasingly restrictive, corporate-style operation.

In 1994, the two men established John Aaroe & Associates by opening a Beverly Hills office with 17 former Jon Douglas agents. Aaroe is president and Field is chief executive officer.

It’s been a hectic and often grueling 4 1/2 years for Aaroe, a tall, athletic man who works from 60 to 70 hours a week. At age 46, Aaroe is struggling to find more time for his personal life, including an unrealized effort to build a home.

“The company has run my life for the past four years,” said Aaroe. “Now, I’m trying to run it.”

After struggling through the brutal real estate bust of the early 1990s, Aaroe said he is constantly concerned about the next market downturn.

During the summer, Aaroe and other brokers have watched as the selling frenzy seen last spring subsided and buyers grew more cautious. Such sudden changes in the market illustrate why Aaroe has limited his network of offices--there are five, to keep costs under control--and to recruit agents experienced at operating in a tough market.

“The buyers are stepping back and looking at prices,” said Aaroe. “I’ve [structured] the company to run in a slow market.”

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Setting Company Apart From Competitors

Aaroe’s past four years have also been contentious at times. After a John Aaroe office opened in Los Feliz a year ago, some rival Jon Douglas agents and managers made false and disparaging remarks about Aaroe, according to a lawsuit filed against the competing brokerage. The suit has been settled but Aaroe said he had agreed not to comment on the outcome.

The suit in part reflects the friction generated by Aaroe as he has picked up scores of employees from rival firms. Aaroe has been successful in capitalizing on the widespread anxiety and frustration of many agents as their brokerages grew ever larger and more bureaucratic. In Los Feliz, about a dozen Jon Douglas Coldwell Banker agents jumped ship when the John Aaroe office opened.

Aaroe had also set his company apart from competitors by emphasizing its local ownership and control in contrast to corporate giants like Coldwell Banker Jon Douglas, which is a subsidiary of N.J.-based Cendant Corp.

Now, following the sale of Aaroe’s firm to Pickford Realty, which does business as Prudential California Realty, Aaroe will have to struggle to meet the demands of working within a large company and maintain the entrepreneurial operation that attracted so many of his agents.

“We are a powerful, privately owned real estate company,” said Aaroe, trying to draw a distinction between the owners of his firm and those of Coldwell Banker. “We are a powerful force in this market.”

Scott Gibson, who heads the Los Angeles-area operations for Coldwell Banker, said the national scope of his parent company does not mean it can’t adapt to differences in local real estate markets.

In addition, he said, Coldwell’s deep pockets and national resources have allowed the former Jon Douglas offices to upgrade the technological tools available to agents and create a computer network linking his division’s nearly 30 offices.

“You can only do that with the resources of a larger company,” said Gibson. “But we operate as a boutique firm on an office-by-office basis.”

Many in the industry had also questioned Aaroe’s once long-standing notion that he could successfully compete against his larger competitors without becoming a huge corporation or linking up with a franchise.

The deal with Pickford Realty underscores the economies of scale--such as lower advertising costs--and deep financial resources that mid-size firms like Aaroe’s need to remain competitive, say industry observers.

Veteran broker Fred Sands, for example, is racing to expand the reach of his privately owned company--which operates primarily in Los Angeles County through a network of about 60 offices--by selling franchises.

Sands, like many others in the real estate business, say that middle-size firms will be squeezed out by “boutique” firms that focus on wealthy clients, and huge firms that sell to the mass market.

“You have to be a small niche player or a large company,” said Sands. “That’s the way the world is going. We have to get larger to compete.”