While many in the industry expect buyer’s agent compensation to drop, industry leaders like Okoniewski are concerned that agents who are lowering their prices are not thinking long term.
“Right now, I predict that agents who offer massive discounts will eventually go bankrupt, no matter how hard they try, because you can’t sustain a business like that,” she said. “Broker margins are already so thin that agents who are weak and trying to explain their business and justify their costs will lag behind agents who demonstrate their value to clients so clients feel they are getting rewarded.” services they paid for.
However, individual agents shouldn’t be the only ones worried about lower commissions. Their brokerage firms, which rely on a cut of those commissions for revenue, may also find themselves in trouble.
Data from real estate accounting software provider Account Technology Research shows that brokerages with profit margins of 3% or less are at risk of losing money even if their commission rates drop slightly. The firm analyzed 100 brokerage firms and found that nearly 80% would be unprofitable if commissions per party were reduced to 2%, while 60% would be unprofitable if commissions were reduced to 2.5%.
In its analysis, AccountTech found that the number of profitable brokerages analyzed increased from 60% for the whole of 2023 to 62% in the first half of this year. For brokerages that are profitable, the average operating profit per agent is $294 per month, while for brokerages that are losing money, the average operating loss per agent is $214 per month.
Such narrow profit margins leave the company vulnerable to commission compression. The study found that from January to June, only 5% of brokerages’ EBITDA (advance earnings, taxes, depreciation, and amortization) profit margins were higher than 9%, while 21% of companies reported EBITDA losses of 1% to 2%.
That’s not good news for an industry that experts love Real Trend Consultants Co-founder Steve Murray expects buyer’s agent commissions to drop 30% to 40% over the next two to three years.
“If the total commission is $100, $50 per party, and the buyer takes a 30% cut, then our commission would be down to $35, which would reduce total revenue by 15%,” Murray said. “We’ve modeled it based on our benchmarks, but it’s ugly.”
While the numbers may seem scary, Tomasello doesn’t think it’s the end of the world for agencies.
“While we believe the impact should be manageable for most, including potential offsets from equity gains and business model adjustments, we also believe the impact will be greater than what many management teams have publicly communicated,” he said. Significant. “As such, we expect this storyline to drive continued volatility for related companies such as residential brokerages and property portals, especially as incremental data points become available on the early impact in the coming weeks and months. Down.”
Murray said brokerages will have to figure out how to increase production per dollar of fixed overhead as they seek to cope with increased pressure on already tight margins.
“They can reduce overhead, but as the market slows in 2022, and many companies have already done that, how much more can they cut,” Murray said. “My advice to my clients now is that if they have confidence they will do whatever it takes and be as efficient as possible, the only answer is to improve and increase the level of production in each office location or agency, or as I say of every dollar of overhead. You have to increase revenue without increasing operating costs.
While some of the nation’s largest corporate brokerage firms also have ancillary operations in title and mortgage originations to help offset declining commissions, Murray still expects M&A activity to increase as companies seek to increase market share to boost revenue.
“It’s a fierce battle for market share right now,” Murray said. “One thing is always absolutely true, any time the federal or state governments impose more regulations on an industry, as they did here, it leads to consolidation. Back in 2010, they introduced The Dodd-Frank Act imposed more regulations on the banking industry, and more than 1,000 community banks subsequently failed, not because they issued bad loans, but because they could no longer afford the regulatory costs.”
While the outlook may not be all sunshine and roses, Murray does have some positive news. “For really good agents, especially on the listing side, they’ll be fine,” Murray said. “They’re going to have to work harder and more efficiently, but they’re going to be fine.”
