As the start date for rule changes resulting from the NAR settlement approaches, a study shows that real estate brokerages need to be revising their operations ahead of time to stay afloat.
A vast majority of America's brokerages, about 79%, will become unprofitable if they fail to transform their operations when
The National Association of Realtors agreed to
NAR said the implementation date allowed a three-month window for members and multiple listing services to prepare for the adjustments.
Many have said they don't expect the rule changes to significantly affect commission splits between seller and buyer representatives. Additionally, hopes for Fed rate cuts have lenders holding out to be rescued by a refinance wave. Others predict a seismic shift.
"We believe the industry is largely unprepared and overly optimistic in its consensus view that impacts will be limited," KBW analyst Ryan Tomasello wrote in an update on the NAR case.
The brokerage accounting software developer studied hundreds of real estate agencies across the U.S. and calculated their future net profits, assuming that commission volume, company overhead, and agent split percentages remain the same. AccountTech found that even a minor decrease in commission rates charged to sellers would make most of the tested companies unprofitable. Even in the event of a modest drop to 2.5%, 60% of them would be in the red.
The data collected shows that the impact of reduced commission rates will come sooner than expected for larger companies. Companies with more storefronts would be the most challenged. Only 14% of firms with at least three storefronts would remain profitable following the changes.
Commission volume per agent is not likely to remain the same following the NAR settlement, so some brokers are preparing for expected changes by redesigning split programs and operating expense structures, the study said. In addition, the way brokerages make their money may see a difference, as the system of Realtors being the leading referral source of new purchase money mortgage business for lenders is expected to change.
AccountTech found that if commission margins drop to 2%, more than 75% of the tested companies would need to increase income or cut expenses by $2,908 per agent. For example, a company with 100 agents would need to cut overhead by $290,800 per year to break even.
The hearing for final approval of the settlement terms is scheduled for Nov. 26, according to the NAR's settlement timeline.
Several firms have issued advice to brokerages on what changes need to be made to prepare for the new commission landscape.
NAR recommendations
As the practice change deadline approaches, the NAR is ramping up
"Our goal is to ensure that all people understand the implications of the settlement and how it empowers consumers with choice," said NAR Vice President of Public Relations Mantill Williams. "Throughout the settlement process, we have been proactively communicating updates and sharing resources with NAR members, state and local associations, brokerages, MLSs, and homebuyers and sellers."
The NAR maintains that offers of compensation can be made off of an MLS through negotiation. Written agreements, which the NAR had encouraged before the settlement to promote a transparent relationship between agents and consumers, must be clearly defined.
"We encourage all members to evaluate your new or revised forms with an eye for clarity and with an emphasis on consumer choice, this is key," said NAR Chief Legal Officer Katie Johnson in a video to members. "Please also prepare and educate real estate professionals and consumers about the revised forms."
Comparing with competitors
Dean Cotrill, associate partner for T3 Sixty's brokerage and team consulting division, shared strategies for brokerages to assess their competitiveness in the market and potential areas for improvement in a webinar hosted by AccountTech.
Cotrill suggested seven areas of profitability that brokerages should be assessing year-over-year to determine where improvements can be made: agent count, units sold, average sale price, average commission per transaction side, retained earnings, operating expenses and return on revenue.
In these areas, which he said are the best uses of time, money and energy, brokerages should have a sense of what's going on in each on a nationwide scale as well as in their local marketplace, and know that there won't be one quick fix.
He suggested that firms do a deep dive competitive analysis at least once a year on their firm and on four to six major competitors in these areas and understand what they're charging. Oftentimes, he said, brokerages will increase their fees if they see they haven't stayed with the times.
Many brokerages say their average sale price is out of their control, Cotrill said, but they can have some sway. A broker's market has higher-priced areas and lower-priced areas, and it's best to tap into both. If the average sale price is below the market average, the broker isn't appealing to the upper price point homes that could be helping to support growth.
Cotrill also recommended using the MLS paired with a mapping system to pinpoint locations in the market that aren't being captured in relation to a broker's offices, its agents' homes, competitors' listings and where listings were sold in the past year. He said the practice is also good for retention as it directs agents to go after areas they might not be aware of.
While it may be a difficult conversation for a brokerage to have with its agents, Cotrill said to not put necessary changes such as their commission on the back burner.
"If you're gonna make an adjustment, now is the time to do it," Cotrill told viewers. "Don't wait. Because of the challenge in the market, your agents are understanding that you need to make some adjustments to what's going on because of the market we're in and the compression we've already been feeling, but also potentially what is coming our way."
Operating expenses are some of the largest costs in any firm. Cotrill recommended putting data on the costs of different operations such as marketing, facility costs and staff into "expense buckets" and evaluating them yearly.
"Instead of you making guesstimates about decisions on running your business, you're making better-educated decisions because you have more data available to you quickly on how things are moving and what's changing," Cotrill said to viewers.
It's also important for lenders to consider the ease of their online loan applications, said Garth Graham, senior partner at Stratmor Group, in an article posted by the firm. If lenders are getting their business primarily from listing agents, those agents oftentimes have an online relationship with consumers. If the lender can offer a link that takes the consumer to an easy loan application and pre-qualification tool, the listing agent will find a lender that can, he said.
Fine-tuning the value proposition
Attorney Marty Green of Polunsky Beitel Green's Dallas branch has been monitoring commissions, and he said the firm hasn't seen dramatic changes so far in the industry besides more variation in commission structure.
Green said this is partially due to successful brokers fine-tuning their value proposition in discussions with a buyer because they know certain sellers may not protect them in terms of commission going forward. Those more robust conversations are also happening with sellers about the importance of maintaining the protection of the buyer's agent.
"I think they should be more prepared," Green said. "If you're ill-prepared for it, you may see a more dramatic change than if you are prepared for having those tough conversations with your buyers and your sellers. I think Realtors that are really prepared are going to help set that expectation so you see less of a change going forward."
Green said many of these changes were already implemented in Seattle, and the city has not seen a drastic change in how Realtors are compensated. He said the more Realtors who are prepared to convince the buyer or seller of the worth of having the real estate agent involved on both sides of the transaction, the more likely it is that we see this as a non-event two years from now.
If a brokerage does not understand their value proposition or cannot define it in a quick pitch to a buyer or seller, they can count on that commission being negotiated down at some point, Green said. It's important that brokerages are able to convey what makes them unique and why they're qualified to complete the transaction.
Green said his firm is starting to see a trend in high-end markets in which, instead of leads being put on a MLS, they are held for private sale within a network of real estate agents that refer to each other, which becomes part of their value proposition. He said we're likely to see more of this in the future and a smaller role held by the MLS.
"A lot of agents, I think, are going to figure out an alternative way to get much of the benefit through their agent network and maximize that value and make that be part of the unique proposition, rather than it be more globally available on the MLS," Green said.
Whether or not practices like that comply with the NAR settlement rules is yet to be determined. Previous restriction efforts like those that would threaten a broker's potential removal from the MLS have "a lot less teeth in them" based on the settlement, but there are still ethical considerations, Green said.
Business model revision and expansion
"The business models are going to have to go through a radical rethink," said AccountTech CEO Mark Blagden in an interview.
The situation can be summed up as a business model revision problem, Blagden said.
Purchase money loans are harder to originate because they take longer to close and cost more, but that's mainly due to lenders originating them the same way as always. With these commission changes, a new approach is required, Graham said.
Cotrill suggested that brokerages use relationships with real estate marketing firms like Zillow to generate leads for their agents and then sell them to those agents at a commission split that's more advantageous to the company. That way, deals can close at a higher commission rate because the company generated the lead before giving it to agents at a higher split, he said.
Blagden said, however, that companies that generate leads like Zillow tend to primarily get buyer contacts. If we move into a market where the sellers decide they're not paying the buyer's commission because they don't have to, and the buyer cannot afford the commission, such leads don't have much value, he said.
Green said it's possible that we may see a bigger shift to where these types of models yield a higher percentage of leads.
Part of the reason that the past three years have made it so hard for lenders to generate business, Graham said in his article, is that most lenders have traditionally waited for their business referral partners to generate business for them. In the future, many low-producing agents may leave the business and there may not be enough leads to go around, he said.
For brokerages, the only two ways to maintain profitability are to either cut expenses or raise revenue. Cotrill said revenue can be raised by exploring extra income streams through a partnership with a title or mortgage company. Blagden added that considering a title venture could be especially beneficial because brokerages will need some way to make money off buyers and sellers, and it won't be the real estate transaction.
Partnering with another entity allows lenders to provide new home options to borrowers in their portfolio, Graham said, and lets them identify when customers in their database are considering an action so they can insert themselves into the transaction early. He said lenders who do not have another operation will need to heighten their marketing efforts or hire LOs who can build relationships with listing agents.
Cotrill said having a marketing service agreement with another entity like a title business can ensure the brokers' protection in a
"The challenge becomes, if your competitor in the brokerage business is a mortgage company, how are you going to compete with them?" Blagden said. "They don't need to make profit on real estate, and you do."
Several large firms have adopted additional mortgage services to create more streams of revenue, like Remax's mortgage brokerage franchisor,
It's more inviting for brokerages to lean into consolidation than expansion because of licensing considerations and other barriers to entry that could pose difficulties, Green said. In certain states, brokerages could run into dual-compensation issues regarding whether a Realtor can be paid while also working as a loan officer.
Cutting expenses and moving online
In the past and especially after the 2008 financial crisis, Blagden said there were rule changes that were perceived as seismic to the housing industry, and yet business went on as usual once they were implemented.
"Almost none of the brokers are preparing in advance for what's going to happen," Blagden said.
"It's the depth of the cuts that's necessary. It's not like a little snip."
One thing brokerages can do immediately is cut labor costs, which will take the form of lots of layoffs over time. It's a difficult choice to make, however, especially given that brokerages have such a small churn rate, he said.
And although layoffs are an easy way to cut expenses, the work still has to be done, and Blagden recommended that brokerages consider outsourcing the majority of their back-office functionality and non-client-facing roles to overseas positions for lower labor expenses. Times have changed, he said, and the peace of mind provided by outsourcing locally often comes with a high price tag that isn't affordable anymore.
Blagden said brokerages need to focus on expense cuts in labor and occupancy. The latter is harder to cut because of leases, but he said many firms are looking into consolidating offices and reducing their overall square footage, especially given that working from home is a new norm post-pandemic.
"As if the commercial real estate industry isn't bad enough right now, this is going to make it worse," Blagden said. "Brokers are going to be shedding storefronts like it's nobody's business."
And as more mortgage companies explore the use of AI and shift their operations online, Blagden said we will see brokerages start to do the same.
There have been talks in the industry about whether a buy-side agent will become obsolete.
An agent is no longer necessary for a buyer to see a home and get a loan, and consumers have been performing more and more of the steps in the process on online platforms. Because of this, Graham said it's possible that the industry may consolidate a buyer's needs into online formats.
In addition, much more activity will take place in online channels and call centers rather than from traditional business referral partners as the mortgage lending business changes to match the industry, Graham said.
In some future models, we may see the listing agent's team include licensed mortgage brokers who can handle much of that work, he said. That means many lenders will be paying too much for the work of front-line salespeople, necessitating a change in compensation, Graham said.
