We have yet to find out the full extent of the court-ordered National Association of Realtors (NAR) settlement back in March on the topic of commissions in which the NAR is expected to pay $418 million over a four-year period in damages and will change numerous rules that housing experts believe will lower house costs going forward.
This settlement is the culmination of a series of lawsuits against the NAR which will ultimately do away with standard commissions. Legal counsel for NAR approved the agreement in early March.
At the time, the New York Times, American homeowners may see a significant decrease in the cost of selling their houses in wake of the agreement that is set to eliminate the industry’s normal 6% sales commission.
But a new study recently released by AccountTECH, an accounting software provider for the real estate industry, shows that virtually all brokerages across the U.S. will become unprofitable once the market changes from the NAR settlement go into effect.
This study assumed that commission rates drop below 6% to 3% per side.
Results of the study
After reviewing the in depth finances for 100 random companies, AccountTECH found that when commissions drop even further to 2%, that 79% of brokerages in the study will become unprofitable. If that number rises to 2.5%, 60% of brokerages become unprofitable.
The study examined profitability based on both agent count and the number of storefronts maintained by the companies. As expected, companies with more storefronts are the most challenged. The results show that for companies with 3 storefronts, only 14% will remain profitable if commission rates drop to 2% per side.
The study based its forecasts on three 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 if any of these three assumptions will actually come to fruition, but the reality is that real estate brokerages is that commission volume per agent is not likely to remain at current levels— given the buyer-side commission changes that are expected in the upcoming NAR settlement. Additionally, broker/owners are already proactively responding to the expected changes in the market. Both commission split programs and operating expense structures are being examined and re-designed. The industry is well aware that going forward, the market changes are going to make their current business models untenable.
AccountTech further said that 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 shows that companies with between 50-75 agents only have a 50/50 chance of being profitable when commission rates drop to 2.75%.
In response to this study, Jim Fite, owner of Century 21 Judge Fite, gave examples of how his company stays prepared for the next real estate market, including:
- We know our number—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 nine 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.
Click here to see the study in its entirety.
