While reading about the $1.8 billion dollar damages claim assessed against the National Association of Realtors, Keller Williams and HomeServices, I wondered what impact this could have economically on the industry. I decided to break down the numbers and look at brokerage economics.
Last year, nationally there were slightly over 10 million transactions of existing homes sales.
Theoretically, multiplying the damage claim by 40 or so would result in a total of $72 billion in damages if extended across the country against all transaction sides.
According to data from RTC Consulting and RealTrends, the total gross commission paid out to residential brokerage firms and their agents over the past five years was approximately $420.9 billion.
What we also know is that the average gross margin, the money that is retained by brokerage firms, is about 14% of gross commissions among all brokerage firms in the U.S., according to RTC Consulting data. So, the brokerage firms’ share of the gross commissions was likely in the range of $58 billion over that period.
Breaking down the numbers
So were a Federal judge — consolidating all the claims against all brokerage firms in the U.S. to set this claim — then it would equal about 124% of all the gross margin that all brokerage firms did in the last five years.
Since the average pre-tax profit margin, according to our data, was approximately 4% over that time, then the approximate profit would have been about $2.3 billion over that period —for the full five-year period. This means that the damage award, if extended nationally, would be 31.3 times all the pre-tax profit made by the brokerage industry during that time frame.
Of course, the significant missing data is that most of the gross commission revenue ends up with the real estate agents and teams. According to our data, 86% of it, on average, across all business models, brands, regions etc. goes to the agents and teams. To the best of my knowledge none of the agents and teams were named in the Missouri case. We do know that in the most recent case filed in Texas some teams and individual agents have been named but only a very short list.
I am not sure that any brokerage firm would have the ability to recapture any of the damages from their agents or teams. Perhaps someone may know how this could be done, but I am not sure how a brokerage could reach back to do so.
This is among the large challenges facing the industry. Those who benefitted the most from the system as it has existed escape any liability in the damage awards.
Steve Murray is the founder and partner of RTC Consulting and a senior advisor to HW Media.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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Steve Murray at [email protected]
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Tracey Velt at [email protected]