AccountTECH study finds 79% of brokerages unprofitable after NAR settlement

BOSTON, June 25, 2024 /PRNewswire/ --

Overview:

A study this week of hundreds of brokerages across the US shows that virtually all will become unprofitable if the NAR settlement reduces commission rates and brokers fail to transform their operations. The study was created by AccountTECH, a time-tested innovator of accounting software solutions for brokerages and franchisors.

The study calculated future net profit for brokerages, assuming that volume, company overhead, and agent split percentages remain at current levels. Given those constants, even minor decreases in the commission rates charged to sellers made the test companies unprofitable.

AccountTECH is hosting a webinar this week to share the study's results. Industry experts from T3 Sixty will be co-hosting to share insights on how industry-leading operators are optimizing their operations for improved profitability.

Results:

After reviewing the finances in depth for 100 randomly selected companies, AccountTECH found that if commission percentages drop to 2%, then 79% of the companies in this analysis would be unprofitable. Even with a modest drop to 2.5%, then 60% of these brokerages will be unprofitable. The companies in this study had agent counts that ranged in size between 5 agents and 5,000 agents.

In part, the study tried to determine if future profitability was predictable on either agent count or the number of storefronts maintained by the companies. As expected, companies in this study with more storefronts were the most challenged. The results show that for companies with 3 storefronts, only 14% would remain profitable if commission rates drop to 2% per side. 

The study based its forecasts on 3 assumptions:

• Commission "splits" between real estate agents and their companies will remain static
• Total commission volume will remain the same
• Operating expenses will remain at current levels

It's not clear that any of these three assumptions are reasonable in the near term. The reality facing real estate brokerages is that commission volume per agent is not likely to remain at current levels. Buyer-side commission changes expected in the upcoming NAR settlement will likely decrease sales volume per agent. On the other hand, broker/owners are already proactively responding to the expected changes in the market. Both commission split programs and operating expense structures are already beginning to be re-designed. The industry is well aware that going forward, the market changes are going to make their current business models untenable.

Based on agent count, the data shows predictable patterns in the likelihood of profitability. For larger companies in the study with between 100 - 5,000 agents, the study shows that 88% will be unprofitable at a 2% commission rate. 

The data shows that for certain sized offices, the impact of reduced commission rates is going to come sooner than expected. For instance, the analysis showed that companies in this study with between 50 - 75 agents only have a 50/50 chance of being profitable when commission rates drop to 2.75%.

Companies that are already starting to adjust their operations for the next cycle can use these study results to gauge the scale of the adjustment they need to make to remain profitable. Assuming that commission margins drop to 2%, for more than 75% of the study subjects, they need to increase income or cut expenses for every agent in their company by $2,908. As an example, a company of 100 agents will need to cut overhead by $290,800 per year to break even.

Jim Fite, owner of Century 21 Judge Fite, has one of the few companies in our study that is already set up to remain profitable regardless of commission rates. Mr. Fite literally wrote the book on how to be successful in difficult economic times ( Success Through A Recession ). In response to this study, he gave examples of how his company stays prepared for the next real estate cycle, including:

• We know our numbers – weekly on Thursday morning at 8:00 am we review all numbers from all departments and companies that we own. 
• We review each lease when the expiration date is 9 months out – do we renew, move, remodel or merge with another office.
• After the pandemic – we realized many of our staff could and loved working from home, therefore, we reduced our back-office footprint/square footage preparing for the future. NOTE: The service level of our clients and real estate professionals have made every deadline and service levels have actually increased with happy clients and employees.
• Months in advance of a "cycle or outside force" we start seeing where we can reduce expenses even more than above.

Summary

This research underscores the need for most brokerages to undergo a major re-invention of their business models and overhead. For many years, there has been pressure to provide agents with an ever increasing share of the commission revenue. This has caused gross profit margins to decrease to a nationwide median of 15%. If commission rates charged to sellers do eventually move downward, the decrease in top line revenue is going to make existing business models even harder to maintain. As ICA contracts between brokers and agents have steadily chipped away at gross profit margins, many in the industry believe that the NAR settlement changes will further challenge brokerages with a likely impact top line revenue.

On the expense side, labor and occupancy expenses have been static or trending upwards since the end of the pandemic. While pandemic restrictions taught brokerages that they can operate virtually, that realization has not translated into reductions in staff or occupancy expenditures. Once commission rates begin to decline, it's difficult to see how US brokerages of any size can be profitable if commission splits stay where they are and operating expenses remain at current levels.

About the company

For over 25 years, AccountTECH's team of real estate accountants and software engineers, have been building tools that increase the efficiency of brokerages. Our team of intelligent, creative & curious problem solvers is constantly adding automation and integrations towards the goal of single-point-of-entry. Their motto is: data entry can happen anywhere, but everything winds up in darwin.

AccountTECH www.accounttech.com (978) 947-3600
Media contact: Rizza Bartol [email protected] (978) 947-3600 ext 763
For sales inquiries, please contact: Theresa Hurt [email protected] (978) 710-0071

SOURCE AccountTECH