Lower commission rates could hurt brokerage firms’ profitability: AccountTech

Concerns about the impact of lower commission rates on real estate agents have attracted much attention since the antitrust settlement agreed to by National Association of Real Estate Agents (NAR), but brokers will also feel losses.

New data from a real estate accounting software provider AccountTech shows that brokers with profit margins of 3% or less risk falling into deficit even with a small decrease in commission rates. More than half of the brokers analyzed had margins that fell between 3% profit and 3% loss.

“Many brokerages have failed to create adaptive business models that can adjust expenses to fluctuations in gross profits,” AccountTech CEO Mark Blagden said in a statement. “These low margins may not withstand even modest commission rate reductions. Faced with the possibility that the NAR settlement could result in across-the-board commission rate cuts, brokerages may need to accelerate their efforts to streamline overhead in order to achieve or maintain profitability.”

The firm analyzed 100 brokerages for the study. The number of brokerages that were profitable increased from 60% in the full calendar year of 2023 to 62% in the first half of this year. For brokerages that were profitable, the average operating profit per agent was $294 per month, while for brokerages that were unprofitable, the average operating loss per agent was $214.

Tight margins are making many brokerages vulnerable to lower commissions. Just 5% of brokerages had an EBITDA (earnings before interest, taxes, depreciation, and amortization) margin above 9% from January through June, while 21% of firms reported an EBITDA loss of 1% to 2%.

While this may suggest that some brokerages are in the black, many others would fall into deficit — or even deeper — if fears of lower commissions come to fruition.

While the full impact of the new changes in business practices will only be known once existing offerings are replaced with the new ones, brokerages have reported mixed results so far.

Compass said in its latest earnings conference call that it saw virtually no change in commissions, with CEO Robert Reffkin saying concerns about lower commissions “simply didn’t materialize.” However, the report Red Fin showed that buyers’ agent commissions fell from an average of 2.62% in January to 2.55% in July.

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