To be successful over the long term, the real estate broker/agent relationship requires understanding and compromise between the two parties – just like a marriage. That give-and-take so necessary in sustaining a productive business relationship is nothing new. Balancing broker profitability against agent income has always been a challenge. What’s new is a shrinking broker profitability. An ever-changing industry demands new adjustments between broker and agent.

Shrinking profitability

Even while we enjoy the longest and strongest real estate market ever, broker profit margins continue to shrink. A 2000 REAL Trends profitability study bears this out: 97 of the nation’s 500 largest real estate brokerages responded, detailing their productivity and profitability for the period from 1994 through 1999. On average, their number of transaction sides and sales volume increased, but their gross commission rates, per unit profits, and profit margins declined.

Survey findings revealed that the larger the operation, the lower the profit margin, but the rate of decline in profitability was greater among the smaller firms. Regardless of the size of the office, increased agent commission rates meant a decrease in broker profitability. The typical broker is now making $100 to $150 per transaction. On top of that diminishing profit margin are constantly rising operations costs: building and furniture leases; investment in new, competitive technology; and all the other expenses for which the broker is responsible, including unallocated overhead.

Agent income

A colleague of mine illustrates the broker profitability/agent income dynamic with a story about his conventional-split office in the 1970s. When his best agent asked him for an 80/20 commission split, he reluctantly told her the truth: he simply could not afford to pay that high of a commission percentage. Nor could any other traditional broker. The only way she could keep that much of her commissions would be if she opened her own office – and then, faced with managerial responsibilities and expenses, she would almost certainly make even less.

Business has changed dramatically since then in terms of technology, customer sophistication, agent professionalism, and commission splits, but agents still seek greater income and better working conditions while brokers still need to make enough profit to remain in business. Someone outside real estate might think the obvious solution to broker profitability – if it’s being squeezed by high agent commissions – is to lower those commissions. Anyone within real estate knows that’s out of the question. Few agents would accept such a reduction. Unlike a broker, who is committed to the firm by financial obligations and legal responsibilities, an independent contractor can just leave.

Additional profit centers

Narrowing profit margins have led brokers to seek profitability in numerous ways. Some receive escrow or transaction fees through relationships with mortgage and title companies and other vendors. Some increase their profit through ancillary services such as home improvement and home repair. In smaller offices, some brokers are forced to compete with their own agents by returning to real estate sales. In some systems, brokers charge shared technology and software fees; in other systems, brokers increase management fees.

No matter what management concept they operate under, brokers must be sensitive to agent needs and be as equitable as possible in their compensation programs. Or else the agents – particularly the good ones – will go elsewhere.

On the other hand, agents need to understand that due to rising operations costs and other factors, brokers must look to additional profit sources. A failing office doesn’t benefit the agent either. Particularly in this period of declining broker profitability, mutual awareness and understanding of the other’s needs is critical for both brokers and agents. Just like in any marriage.