80% of real estate brokerages won’t be profitable with lower agent commissions at 2%

If real estate brokerages don't adapt their operations, 79% of them will be unprofitable if the terms of the National Association of Realtors’ (NAR) nationwide commission lawsuit settlement agreement lead to typical agent commissions dropping to 2%. This is according to a study published Tuesday by AccountTECH.

The study analyzed the operations of 100 randomly selected brokerages with agent counts ranging between five and 5,000.

The report calculated the future net profit for brokerages while assuming that sales volume, company overhead, and agent split percentages remain at current levels. It found that even a minor decrease in the commission rates charged to sellers made the companies in the study unprofitable.

AccountTECH noted that it is unclear if any of the assumptions it based its forecast on are reasonable in the near term. The firm noted that the industry is already seeing broker-owners altering commission split programs and operating expense structures in response to the potential for lower agent commissions.

“The industry is well aware that going forward, the market changes are going to make their current business models untenable,” the report states.

While nearly 80% of firms would be unprofitable if commissions dropped to 2%, the study found that 60% would be unprofitable if commissions dropped to 2.5%.

Additionally, the study looked at how agent count and physical office count impact future profitability. It found that among the companies with three storefronts, only 14% would remain profitable if commission rates drop to 2% per side. When it comes to agent count, the study found that for firms with 100 to 5,000 agents, 88% will be unprofitable if the average agent commission drops to 2%.

If brokerages hope to break even, AccountTECH found that if commission rates drop to 2%, more than 75% of the firms analyzed will need to increase their income or cut expenses for every agent in their firm by $2,908, or a total of $290,800 per year for a 100-agent firm.

These challenges come as brokerage gross profit margins have fallen to a nationwide median of 15%. This is due to a variety of factors, including increased pressure on brokers to provide agents with a larger split of the commission.

Additionally, rising labor and occupancy expenses have driven up operating costs, putting even more pressure on firms’ top-line revenue.