Modest gains as more Real Estate brokerages turn Profitable by mid-year 2024

Profitability Trends in 2024

AccountTECH, a leading provider of enterprise-class accounting software for the real estate industry has released a new study of Real Estate brokerage profitability. The study analyzed EBITDA margins for brokerages from January to June 2024, focusing on 100 randomly selected companies known for maintaining accurate GAAP protocols and excluding those inflating profitability through broker/owner personal sales.  Collectively,  these 100 companies closed 51,769 sides with 17,749 agents in the period.

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Why use EBITDA margins instead of Net Profit for benchmark analysis

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) clearly shows operating profitability - and it is the best way to compare one compay to another.  The operating net profit (or EBITDA) show how much profit a company has made through their best efforts to increase sales and reduce expenses.

In every company's financials there is "other income" and "other expenses" that are not really part of operations, but are critical to include for tax reporting and other reasons.  Other income and Other expenses are typically items that cannot be directly controlled by management.  

Typical other income items that are not included in operating profit include

• tax refunds
• franchise royalty rebates
• legal settlements
• interest income

Typical other expense items that are not included in operating profit include

• bank fees
• taxes
• amortization
• depreciation

Some companies may have very large other income and/or other expenses.  These can skew net profit both positively and negatively for some companies to an extent that makes company-to-company comparison meaningless.

For these reasons, AccountTECH uses Operating profit before other income and other expense whenever we are studying company benchmark analysis.

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Key Findings: Profitability and Losses

AccountTECH’s in-depth analysis found that 62% of the brokerages achieved a positive net operating profit in the first six months of 2024 - a modest increase from 60% for the full year 2023.

• Average Operating Profit per Agent: Profitable companies reported an average operating profit of $1,767 per agent for the period - or $294 per agent per month.
   
• Average Operating Profit per Side: Profitable brokerages earned $589 per transaction side.
   
• Losses in Unprofitable Companies: Unprofitable companies faced an average loss of -$1,284 per agent for the period - equating to a loss of -$214 per agent per month.
   
• Average Operating Loss per Side: Unprofitable brokerages lost $462 per transaction side, with some brokerage labor costs per transaction exceeding $900.

Profit Margins and EBITDA Insights

The study also explored EBITDA margins, a key indicator of the scale of profitability. More than half of the brokerages analyzed had EBITDA margin percentages between -3% and +3%. Notably:

• Narrow Margins: 21% of the companies had losses with negative EBITDA margin percentages between -1% and -2%. This indicates that many brokerages are only slightly unprofitable.
   
• Challenges in Achieving High Profit Margins: Only 5% of the brokerages reported EBITDA margin percentages above 9%. This underscores the difficulty of maintaining significant profitability in the current market.

Commentary

Mark Blagden, CEO of AccountTECH, commented on the findings: “While these results show a slight positive trend, they also highlight challenges for the industry in the coming year. Many brokerages are failing to create adaptive business models that can adjust expenses in response to fluctuating gross profits. Additionally, EBITDA margins of 3% or lower are concerning; such slim margins may not withstand even minor reductions in commission rates. Faced with the possibility that the NAR settlement may drive commission rates generally lower, brokerages may need to accelerate their efforts to streamline overhead costs to attain or maintain profitability.”

Conclusion

This study indicates that while U.S. brokerages are beginning to focus more on profitability, significant challenges remain. Many brokerages are trying to become profitable by adding revenue through mortgage, title, and insurance services. But these complementary businesses should not become a replacement for brokerage profitability. Many of the companies in this study show that brokerages can return meaningful profitability thru efficient operations and strategic cost management.