If real estate brokerages fail to change the way they do business, 79% of real estate brokerages will not be profitable. national association of realtors (NAR) National commission litigation settlement results in typical agent commissions falling to 2%. That’s according to a study published Tuesday Accounting Technology.
The study analyzed the operations of 100 randomly selected brokerage firms with between 5 and 5,000 agents.
According to the report, the study calculated the future net profits of securities firms while assuming that sales volume, company management expenses and agent sharing ratios remained at current levels. The study found that even a slight decrease in the commission rates charged to sellers would make the companies in the study unprofitable.
AccountTECH noted that it is unclear whether any of the assumptions underlying its forecasts are reasonable in the short term. The company noted that the industry has seen broker owners changing commission distribution plans and operating expense structures in response to the possibility of lower broker commissions.
“The industry is clearly aware that future market changes will make their current business models unsustainable,” the report states.
Nearly 80% of companies would not be profitable if commissions were reduced to 2%, but research found that 60% of companies would not be profitable if commissions were reduced to 2.5%.
Additionally, the study examines how the number of agents and physical offices impacts future profitability. The study found that among companies with three stores, only 14% could remain profitable if commission rates per side were reduced to 2%. In terms of agent numbers, the study found that for firms with 100 to 5,000 agents, 88% would be unprofitable if average agent commissions fell to 2%.
AccountTECH found that if brokerage firms hope to break even, if commission rates drop to 2%, more than 75% of firms surveyed would need to increase revenue or cut the firm’s fees per agent by $2,908, a total of $2,908 per agent. Reduction of $290,800.
The challenges come as brokerage gross profit margins have fallen to the national median of 15%. This is due to a number of factors, including greater pressure on brokers to offer larger commission splits to agents.
In addition, rising labor and occupancy costs have pushed up operating costs, putting greater pressure on companies’ top lines.
