While many in the industry were expecting a drop in buy-side agent compensation, industry leaders like O’Koniewski are concerned agents who are dropping their prices aren’t thinking long term.
“Right now, I’m predicting that those agents who are doing a lot of discounting are going to eventually go out of business no matter how hard they try simply because you can’t sustain a business like that,” she said. “Broker margins are already so thin and those agents who aren’t strong and are getting caught up in trying to explain what they do and justifying their costs, will fall behind the agents who show clients their value so the client feels like they are getting the service that they paid for.”
Individual agents, however, shouldn’t be the only ones concerned about lower commissions. Their brokerage firms, which rely on a split of those commissions for revenue, may also find themselves in a tough spot.
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. The company analyzed 100 brokerages and found that nearly 80% of firms would be unprofitable if commissions per side dropped to 2% and 60% would be unprofitable if commissions dropped to 2.5%.
In its analysis, AccountTech found that the number of profitable brokerages analyzed 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.
Such narrow margins leave firms vulnerable to commission compression. The study found that 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%.
This is not good news in an industry where experts like RealTrends Consulting co-founder Steve Murray are expecting to see buyer broker commission drop 30% to 40% in the next two or three years.
“If the total commission is $100 and it is split $50 per side and the buy-side gets cut 30%, we are down to $35, which reduces overall revenue by 15%,” Murray said. “We’ve already modeled this against our benchmark and it is ugly.”
Although these numbers may seem a bit dire, Tomasello doesn’t believe it is the end of the world for brokerage firms.
“While we believe the impact should be manageable for most, including potential offsets from share gains and business model adjustments, we also think impacts will be more material than what many management teams have conveyed publicly,” he said. “We therefore expect this storyline to drive continued volatility for related companies, such as the residential brokerages and real estate portals, particularly as incremental data points become available in the coming weeks and months regarding early impacts.”
As brokerages look to contend with increased pressure on their already tight margins, Murray said brokerages are going to have to figure out how to increase their production per dollar of fixed overhead.
“They can reduce overhead, but a lot of them have already done that with the market slowdown in 2022, and how much more can they cut,” Murray said. “My advice to my clients right now, is if they are confident, they cut all they can and gotten as efficient as they can, the only answer is to improve and raise the level of production per office location or agent or as I call it, per dollar of overhead. You have to drive up revenue without increasing your operating costs.”
While some of the nation’s largest corporate brokerage firms also have affiliated businesses in title and mortgage origination to lean to help offset the drop in commissions, Murray still expects to see increased M&A activity as firms look to increase market share in order to build revenue.
“It is now a dog fight out there for market share,” Murray said. “The one thing that is always absolutely true, is any time a federal or state government step in with more regulations on an industry, as they have here, it will cause consolidation. They put more regulations on the banking industry with Dodd-Frank back in 2010 and well over 1,000 community banks subsequently went out of business not because they made bad loans, but because they couldn’t afford the cost of regulation anymore.”
Although the outlook may not be all sunshine and roses, Murray does have some positive news. “As far as the really good agents, especially ones on the listing side — they are going to be fine,” Murray said. “They are going to have to work harder and more efficiently, but they are going to be fine.”