Are real estate brokerages becoming more or less profitable?
What direction is the brokerage business headed?
And what is the true value of a residential RE brokerage? (The answer is not what you’d expect).
In today’s article, we’ll go over these questions.
Let’s jump in.
Profitability History + Direction
Residential Real Estate Brokerages’ bottom line has experienced considerable pressure over the last couple of decades.
Part of this pressure is the result of a decrease in both Gross Commission Income (GCI) percentages and commission splits.
Over the last 20 years, the average total Sales Price Commission charged to residential property owners has decreased from 6% to 5% or lower in many markets across the U.S.
That equals a 16% decrease in top-line revenue!
On top of that, during the same time frame, two of the biggest expenses in a brokerage, occupancy, and personnel, have increased significantly.
That puts even more pressure on the brokerages’ bottom line.
And unfortunately, it doesn’t look like it’s slowing down.
Competition across the industry has increased significantly.
There are more agents and brokerages now than ever. Five years ago, there were just over 106 thousand brokerages; now, that number is 130 thousand (T360).
Due to the increased competition, many brokerages have adjusted their compensation models. Some include a 90% or even 100% commission split or a simple transaction fee to an agent for every transaction side (the “Transactional Model”).
Then, to add salt to the wound, the industry is facing potential changes to the buyer agent commission rules. Some experts think it’ll result in a reduction in the buyer agent commission.
In short, the future of the typical Residential Real Estate Brokerage’s profitability is challenging.
Agent splits are continuing to erode.
Brokers are lowering their fees to recruit more agents.
And competition is only going to get fiercer.
But luckily, hope is in the air.
The real value
The most important metric for a Residential Real Estate Brokerage is the number of transactions or sides. Every brokerage’s goal should be improving or maximizing this metric.
It’s the most important metric because brokerages make money when a transaction closes.
In other words, the true source of revenue for a brokerage is the commission paid by a consumer. Plain and simple.
Here is a hypothetical breakdown of what a typical brokerage makes in revenue and income from a single transaction:
- Sales price: $500,000
- Sales Commission: 5%
- Gross Commission Income: $25,000
- Agent / Brokerage split: 85/15
- Gross Margin (revenue): $3,750
- Average Brokerage Profit Margin: 10%
- Net Income to Brokerage: $375
But here’s the catch.
The real value of a brokerage isn’t just the total number of transactions.
It’s the fact that the brokerage and its agents have ownership of the relationship with the consumer.
(That’s the hope we mentioned earlier).
The key to long-term success as a brokerage is the ability to leverage that relationship into additional revenue.
You might be wondering – How can I leverage my “ownership” of the transaction into more revenue?
By adding an Ancillary Service to your brokerage.
Let’s say the same brokerage from above had an Ancillary Mortgage Company and captured the same transaction for additional revenue. How much additional revenue and income would it bring to the brokerage?
Let’s break it down:
- 80% Mortgage: $400,000
- Typical Origination Fee: 1.0%
- Mortgage Revenue: $4,000
- Average Profit Margin: 25%
- Net Income: $1,000
By just adding mortgage, the brokerage’s net income on a single transaction tripled!
Today, we talked about the history of brokerage profitability, what the true value of a brokerage is, and how to make more money.
To summarize, leveraging the purchase side transaction revenue through mortgage, title, and escrow will become increasingly more important to the brokerage’s bottom line.
And right now, this market is the best time to enter an Ancillary Service.
Because when the market is down you can set the foundation. Then when the market comes roaring back, you’ll be ready.
See ya’ll next week.
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