Boston, 6/11/2024 - A recent study finds that even minor decreases in the commission rates charged to sellers will make virtually all US real estate brokerages unprofitable.

AccountTECH, a leading provider of enterprise-class accounting software for the Real Estate industry, has just released the results of this study they produced that examines the likely profitability of brokerages at various commission levels below 6%.  (3% per side) 

Results

After reviewing the finances in depth for 100 randomly selected companies, AccountTECH found that when commission percentages drop to 2%, then 79% of all US real estate brokerages will be unprofitable. And if commission rates only drop to  2.5%, then 60% of all real estate brokerages will be unprofitable.

The study examined profitability based on both agent count and the number of storefronts maintained by the companies.  As expected, companies with more storefronts are the most challenged when trying to remain profitable.  The results show that for companies with 3 storefronts, only 14% will remain profitable if commission rates drop to 2% per side.  This analysis based the forecasts on 3 assumptions:

• Commission “splits” between real estate agents and their company will remain static
• Total commission volume will remain the same
• Operating expenses will remain at current levels

It’s not clear that any of these three assumptions are reasonable in the near term.  The business challenge facing the owners or real estate brokerages is that commission volume is not likely to remain at current levels - given the changes being forced on the market by the upcoming NAR settlement.  Additionally, both commission split programs and operating expense structures are already beginning to be re-designed. Broker owners are well aware that going forward, the market changes are going to make their traditional business models untenable.  

When evaluating the likely profitability based on agent count, the results showed that companies with more than 50 agents are likely to be unprofitable at a 2% commission rate.  By far, when commission rates drop, the most challenged companies are going to be those with between 100 - 200 agents.  Unexpectedly companies with between 50 - 75 agents seem to be the most vulnerable.  With a reduction of commission rates to 2.75%, more than ½ of companies in this size range will be unprofitable.

Comments

Since every real estate company offers a different value proposition to real estate agents, the study assumes that regardless of the business model, geographic

Jim Fite, owner of Century 21 Judge Fite, has one of the few companies in our study that is already set up to remain profitable regardless of commission rates. Mr. Fite literally wrote the book on how to be successful in difficult economic times ( Success Through A Recession ).  In response to this study, he provided many useful tips, including:

• We know our numbers – on Thursday morning at 8:00 am we review all numbers from all departments and companies that we own.  
• We review each lease when the expiration date is 9 months out – do we renew, move, remodel or merge with another office ?
• After the pandemic – we realized many of our staff could and loved working from home, therefore, we reduced our back-office footprint/square footage in preparing for the future.  NOTE:  The service level of our clients and real estate professionals has made every deadline and service levels have actually increased with happy clients and employees.
• Months in advance of a “cycle or outside force” we start seeing where we can reduce expenses even more than above.

Brokerages are already moving aggressively by evaluating both the income and expense side of the equation. Most are re-evaluating their commission plans and exploring auxiliary services to increase revenue and move their revenue base beyond reliance on commission.  The expense side is more challenging.  Many leases were signed just after the pandemic and are not yet up for renewal.  But since labor costs represent the highest percentage of costs in most brokerages, the nascent trend towards outsourcing non real estate functions is gaining momentum.

Summary

This research underscores the need for most brokerages to undergo a major re-invention of their business models and overhead.  For many years, there has been increasing pressure to provide agents with an ever-increasing share of the commission revenue. This has caused gross profit margins to decrease to a nationwide median of 15%.  If commission rates charged to sellers do eventually move downward, the decrease in top-line revenue is going to make existing business models even harder to maintain.  As ICA contracts between brokers and agents have steadily chipped away at gross profit margins, many in the industry believe that the NAR settlement changes will make it more difficult to maintain top-line revenue. 

On the expense side, across the US, labor and occupancy expenses have been static or increasing since the end of the pandemic.  The pandemic restrictions taught brokerages that they can operate virtually, but that has not led to reductions in staff or occupancy expenditures. Once commission rates begin to decline, it’s difficult to see how US brokerages of any size can be profitable if commission splits stay where they are and operating expenses remain at current levels.

About the company
For over 25 years, AccountTECH's team of real estate accountants and software engineers, have been building tools that increase the efficiency of brokerages. Their latest flagship product is darwin.Cloud - a 4th generation evolution of their popular back office software. A team of intelligent, creative & curious problem solvers is constantly adding automation and integrations towards the goal of single-point-of-entry. Their motto is: data entry can happen anywhere, but everything winds up in darwin.Cloud. Your single source of truth.

AccountTECH   www.accounttech.com   (978) 947-3600
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