Editor’s note: Real estate brokers are feeling pressure on profits from all sides. Business and insurance costs are up, top-producers want higher commission splits and new technology, and new competition in the brokerage space is lowering the average commission on a home sale. In this three-part series, we dive into the economics of real estate brokerage, find out what brokers are thinking and what they’re doing to protect their stake. (See Part 2: Liability costs, technology, discounted commissions and Part 3: Taking on the real estate enemies.)
There has been a lot of talk in the industry about thin and thinning profit margins for real estate brokers, and about the competing budget pressures and demands that drive up their expenses.
Statistics, though, present a different picture. Brokers are generally not going broke. In fact, their profits are up, their numbers are growing, and the view from on top is even better – some of the largest brokerages are doing exceptionally well.
The “2004 Profile of Real Estate Firms,” a National Association of Realtors study, found that about 60 percent of all residential real estate firms had increased profitability in 2003 compared with 2002, and 53 percent of all residential firms expected profitability to increase this year. The latest numbers compare with the association’s “2001 Profile of Residential Brokerage Firms,” which found that 49 percent of all residential brokerages had increased profitability in 2000 compared with 1999.
And the total number of real estate brokerages has been on the rise. The big brokerages – those with four or more offices – got bigger from 1999-2004, the study also found. Brokerages with four or more offices had an average of 23 agents per office in 2004, compared with 14 agents per office in 1999. Meanwhile, one-office brokerages had three agents per office, on average, in 2004. And overall, real estate firms since 1999 typically have employed five or fewer agents. There were about 229,500 brokerages in 1992, 221,650 in 1997, and about 258,650 in 2002, according to U.S. Census data.
Steve Murray, co-founder and co-editor of Real Trends Inc., a publishing and communications company that offers industry analyses and information about the residential real estate industry, said that profit margins for the top revenue-generating companies have been on the upswing over the past three years. Among those top firms in the country – those that represent about 30 percent of total real estate transactions – the average pretax income in 2003, before owners’ compensation, was 7 percent, “which is an improvement of over two points in the last three years.” Data was collected from 135 companies that are among the top 500 in the country.
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While profitability is increasing, per-person productivity has declined from 12.2 closed transactions per year to 11.2 closed transactions per year from 2001 to 2003. And the average gross commission per agents has gone up from about $68,100 to $70,300 in that time. “They are doing fewer deals but making a little bit more money because the average price of what they’re selling is going up.”
The average profit per closed transaction in 2003 was $458 per unit, according to Real Trends data. And Murray said that real estate brokerage profitability among the top firms is very comparable to the FORTUNE Service 500 list, perhaps “a little less but not substantially less, and that doesn’t factor in brokerage profits from ancillary services and service agreements relating to mortgage, title, escrow and closing services, for example, he said. “The market has just been terrific.”
Brokerages are also getting more efficient, he said, and the gross commission revenue per square foot was up 12 percent in 2003 compared to the prior year, he said. “Leading firms are doing better now than at any time, in the last 15 years,” he said. And for the top 20 percent of firms studied by Real Trends, profitability was “almost double the average profitability of all the firms in the study,” he added.
Ancillary services are a viable way to enhance brokerage profitability, according to a report released this year by Clareity Consulting & Communications Inc. The report, “Broker’s Survival Guide: Building Ancillary Relationships,” stated that the average net profitability for brokers from a single transaction was $210 – well below the average among top brokerages. Also, the report stated that broker margins are lower now than they were two decades ago owing, in part, to competition between brokers to lure real estate agents who are top producers.
John Bearden, president and CEO of GMAC Home Services, said ancillary services represent tremendous opportunity for real estate brokerages. “It’s a very unique time in this business, and a very unique opportunity,” he said. “Broker margin has a chance to improve four, five, six times. In this situation, where you are talking about transformation of a business model, it’s a win-win-win for everybody.”
These days, he said, profitability is more about the types of services a real estate brokerage offers than about the overall size of the brokerage. “I think it’s more about how companies define themselves,” he said. And by expanding their range of service offerings, companies can “not only give consumers what they want (they can) generate an acceptable profit per transaction.”
When the real estate market slows down, it will likely lead to a decline in the total population of real estate agents. This could be a good thing for the industry as a whole, he said, as the most successful and committed agents will remain in business. GMAC is raising the bar for its own agents, and Bearden said that for its company-owned operations, the goal is to reach the highest per-person productivity numbers of any company in the industry within five years.
GMAC is investing in transaction management platform technology to make real estate transactions more efficient for all parties, and has also invested in communications technologies to allow its agents to be more “virtual and mobile.” Bearden said that his company’s margins are good, and he expects margins to improve for those companies that are willing to evolve their business models and invest in new technologies.
While some multi-office mega-brokerages are achieving favorable profits these days, the middle-market brokerages seem to be a dying breed, said Dennis J. Badagliacco, broker-owner of RE/MAX Valley Properties in San Jose, Calif., which has about 70 agents. “I think the middle is going away. It’s being priced out. It’s not competitive to be in the middle.”
The rush to slim down brokerage profits in favor of a higher commission shares for agents has run its course, Badagliacco said. “Every broker out there knee-jerks to everybody else,” he said. “Profit margins have eroded and I think we’ve done that to ourselves. Brokers in general started giving away a lot more than they realistically should have to marginal agents.” The practice of “giving (agents) huge splits just to get them in the door” must stop, he said.
Brick-and-mortar costs, as well as technology costs, can stack up quickly for mid-sized brokerages, Badagliacco said, and brokers have to remain relevant with their technology purchases while running efficiently. “The brokers that I know – we don’t want any beta anymore. That’s come and gone. We’re looking for hardcore technologies that we can use and apply.” Technology, he said, has been a magnet in attracting agents to his brokerage.
Ancillary services are a growing source of revenue for many real estate brokers, he acknowledged, though he said that brokerages should concentrate on the core business. “What I see with a lot of the people at the national level as well as the local level – they are relying more on ancillary services than they are on core business, which I felt for a very long time is a very slippery slope,” he said. “If transactions aren’t done, you don’t get any ancillary either. That has always made me fearful.”
Tomorrow: What’s the real margin squeeze?
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