HousingWireHousingWire
Concerns over how lower commission rates will impact real estate agents has received a lot of attention since the settlement of antitrust lawsuits agreed to by the National Association of Realtors (NAR), but brokerages will feel the pinch too.
New data from real estate accounting software provider AccountTech shows that brokerages with profit margins of 3% or less run the risk of falling into the red with even a minor decline in commission rates. More than half of the brokerages analyzed had margins that fell between a 3% profit and a 3% loss.
“Many brokerages are failing to create adaptive business models that can adjust expenses in response to fluctuating gross profits,” AccountTech CEO Mark Blagden said in a statement. “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.”
The company analyzed 100 brokerages for the study. The number that were profitable rose from 60% in the full calendar year of 2023 to 62% in the first half of this year. For profitable brokerages, the average operating profit per agent was $294 per month, while for unprofitable brokerages, the average operating loss per agent was $214.
The narrow margins are leaving many brokerages vulnerable to lower commissions. Only 5% of brokerages had an EBITDA (earnings before interest, taxes, depreciation and amortization) margin above 9% from January through June, while 21% of companies reported an EBITDA loss of 1% to 2%.
While this suggests that some brokerages are comfortably in the black, many more would sink into the red — or even further into the red — if the fears about lower commissions materialize.
While the full impact of the new business practice changes won’t be known until new listings replace existing ones, brokerages have reported mixed results thus far.
Compass reported on its recent earnings call that it is seeing virtually no changes in commissions, with CEO Robert Reffkin saying the fears about lower commissions “have simply not materialized.“ But a report from Redfin showed that buyer agent commissions fell from an average of 2.62% in January to 2.55% in July.
