Retained Company Dollar Drops
REAL Trends’ highly sought-after brokerage benchmark report offers invaluable insights into the residential real estate industry, and our recent update is certainly illuminating.
by Scott Wright
When analyzing the profitability of brokerages, the first metric that most industry experts key in on is retained company dollar. For every dollar of commission earned, how much is the broker keeping? Per the latest update, on average from 2015 to current, brokers are only keeping a staggering 15.9 percent!
15.9%, gasp, wow! Brokers have, of course, been dealing with a decline in retained company dollar for decades now, though it seems like yesterday that if you couldn’t keep 30 percent, it was time to hang up your cleats. However, structural changes to the industry have led to the crumbling of this floor, and retained company dollar seems to keep declining year after year.
In the last six years since we’ve formally been tracking this data, we’ve seen rampant declines. Back in 2012—the year home prices started to rise after the Great Recession—the national average was 22.9 percent. Fast forward to 2016, the last full year of data we have, and retained company dollar has taken a 29 percent haircut. When will the bleeding end?
Who knows? What we do know though is that there’s an ongoing decline in retained company dollar, so let’s dig a little deeper into the numbers.
Feeding this benchmark is financial data from hundreds of valuations we’ve performed for firms of all shapes and sizes located all across the country. If 15.9 percent is the national average, how do things look regionally?
We break out the regions into the Northeast, Midwest, South and West. As you can see, different parts of the country march to different beats of the drum. The highest retained company dollar is in the Northeast, clinging just above 20 percent. Not too far behind is the Midwest with an 18.2 percent average. Then, you get to the South and West where retained company dollar is substantially lower. Brokers in the western portion of the country, in particular, see their margins pinched, with the average now under 15 percent. For every dollar of commission earned, brokers see less than fifteen cents!
With retained company dollar wildly varying from one side of the country to the other, you wonder how westerners and southerners can make a buck while keeping 40 percent less. However, you don’t need to look far when you consider office-level revenues. Displayed in this chart is average Gross Commission Income (GCI) per office in each region, and it’s clear that brokers in the south and west are compensating for the lower margins by demanding higher revenues from each office.
This disparity is not all that surprising if you know anything about how a broker in, say, Cape Cod operates compared to one in Dallas. On Cape Cod, agents value office space a lot more than those in Dallas. Cape Cod agents also expect their broker to provide more marketing and related materials. As a result, brokers typically have higher operating expenses and won’t pay as high of a split to cover these expenses.
In Dallas, your average agent doesn’t need as much square footage in the office, nor do they require as much corporate-level marketing. So, while operating expenses are lower on average for a Dallas broker, they need to pay higher splits, which naturally leads to lower retained company dollar. Further supporting this is another benchmark metric that compares average agents per office. In the Northeast, we’re seeing just over 50 agents per office, compared to 125 in the South.
When you consider office-level revenue, which has a direct correlation with agents per office, the regional differences in retained company dollar aren’t all that concerning. What is concerning is the ongoing decline in how much the brokers are keeping across the board. It’ll be interesting to see how things pan out in the years to come, especially when we see a downturn in the housing market.