If commission rates drop significantly as a result of the National Association of Realtors antitrust lawsuit settlement, it’s potentially an existential threat to many brokerages. But which ones and how many?
Data from AccountTECH might bring us closer to an answer. Based on a sample of 100 brokerages of varying sizes and expenditures, the data shows a general trend of larger brokerages being more sensitive to a drop in commission rates than smaller ones.
That’s because many large brokerages still pay for office space and middle management.
“You know that expression they tell you at Weight Watchers — don’t eat bread because you’re probably going to put jam on it?” asked AccountTECH CEO Mark Blagden. “Don’t open an office because you’re going to have to staff it.”
Blagden’s study divides the sample by agent count at brokerages and then applies different commission rates to their 2023 financials. The commission splits at the brokerages and their expenditures are held constant.
While smaller brokerages are generally starting from better financial footing, they’re also less sensitive to lower commissions. For brokerages with fewer than 30 agents, 65% are profitable at a 3% commission rate while 35% are profitable at a 2% commission.
A 30 percentage point drop is certainly dramatic, but for brokerages with an agent count between 75 and 100 agents, 90% are profitable at a 3% commission and only 20% are profitable at a 2% commission, 70 percentage point drop.
Larger brokerages are already struggling, though it’s fair to say they have more resources at their disposal to. For brokerages with an agent count between 200 and 300, only 42% are profitable at a 3% commission and it drops to 17% at 2.5%, according to AccountTech. With an agent count between 100 and 200, 64% are profitable at a 3% commission, but that number plunges to 9% at a 2.25% commission.
Blagden says that the 50-to-75-agent brokerages are in the best position to sustain drops. He sees the average commission right now being about 2.5%, and 70% of brokerages in that agent count range are profitable, which is significantly higher than other ranges.
While those brokerages do see a drop to just 20% at a 2% commission rate, that’s more than brokerages above 50 agents, and it only drops below 50% at that rate.
“Having 75 to 100 agents seems to be the best place to be because you don’t necessarily have to have management, you don’t have to have a lot of offices, you don’t have to have a lot of managers, and you can just take most of that to the bottom line in terms of profit,” he said.
He added that the most impactful ways for brokerages operating in the red to get into the black is to dump office space or take a higher split of commissions.
While it’s largely expected that commissions will drop as a result of the new settlement rules, different brokerages have reported different numbers. On its second-quarter earnings call, Compass disclosed that it has not seen any movement in commissions, while Redfin reported that they’ve dropped.
