What’s Going On WIth Brokerage Profitability?

With national gross margin, average commission rates and agent productivity declining, what is going on in real estate?

There’s been a lot of discussion about the decline of profitability in brokerage firms over the past 5-10 years. We know that the average commission rate has dropped about 20 basis points in the last five years (5.32 to 5.12) and the average national gross margin (the percent of gross commissions retained by the brokerage firm after paying agent commissions and franchise fees) has declined (from approximately 23 percent to 18.5 percent at the end of 2016) and agent productivity at the national level has declined somewhat in that time.

But, based on our analysis of the hundreds of companies for which we provided valuations or operational analysis over the last five years, we can look at some solid data. Also note that we do valuations and financial assessments for virtually every kind of business model, franchise brand and region of the country.

Gross margin EBITDA Gross margin

Per agent Per agent Per office

2012 $16,087 $3,279 $858,825

2016 $8,382 $2,150 $1,246,710

The average gross margin per agent has fallen nearly in half. The average EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) has fallen by nearly one-third. But, the average gross margin per office has risen over 45 percent during the same time.

The answer is that brokerage firms are responding to the decline in commission rates, gross margin per agent and EBITDA per agent by simply growing larger offices with more agents. With the two main costs of a brokerage being employment (33 to 38 percent of gross margin) and occupancy (18 to 24 percent of gross margin), and where these are mainly fixed costs and without much variability due to size of an office, brokerage firms have found they can maintain their total EBITDA per office by growing larger offices even when other metrics are moving in the wrong direction.

As I have heard Gary Keller of Keller Williams say several times, “the ownership of a brokerage company has no guarantees except that without careful attention you can lose money,” (paraphrasing of course). There is no right way for brokerage owners to make a profit; there is only the potential to make some. Owning a brokerage is not for the faint of heart. It’s hard, for instance, to list and sell, while also trying to recruit and develop agents, develop technology and marketing tools, manage people and costs. It’s challenging enough to own and manage a brokerage without trying to also list and sell.

Originally published by Realtrends.com