This report does not constitute a rating action.
The National Association of Realtors (NAR) will no longer allow real estate listing agents (representing home sellers) to offer compensation to buyers’ agents to post on the Multiple Listing Service (MLS), where more than 85% of American homes are traded. If a settlement on March 15, 2024, (pending court approval in mid-July) is approved, seller agents can post listings on the MLS without necessarily offering to split the commission with the buyer’s agent.
The two U.S. real estate companies that we rate, RE/MAX LLC (BB-/Stable) and Anywhere Real Estate Group LLC (B/Stable), were defendants alongside the NAR in class action lawsuits filed several years ago on behalf of home sellers. RE/MAX and Anywhere (parent of Sotheby’s International Realty, Coldwell Banker, Century 21, Corcoran, ERA, and Better Homes and Gardens Real Estate) took settlements in October 2023.
In this report, we address questions from investors on credit risks for the companies related to the settlement, hypothetical scenarios, and complexities in estimating commission income amid broader uncertainty.
Frequently Asked Questions
What does the NAR settlement mean for our ratings view of real estate brokerages?
Our base-case view for now is that potential commission income compression is a modest credit negative, but it won’t necessarily have a material impact on either company. A potential drop in commission rates is difficult to ascertain at this stage and depends on how consumers and agents respond to the rule change. In our view, it would make it more apparent to real estate industry professionals and consumers that agent commission is negotiable. This exposes brokerages and their parent companies (Anywhere and RE/MAX) to changes in agent compensation because they take a cut of home sales. Commissions represent a meaningful portion of each company’s total revenue. We estimate about 80% of revenue is tied to commissions for Anywhere and 21% for RE/MAX. Unlike Anywhere, RE/MAX collects an additional and substantial stream of revenue from annual fees it charges agents to associate with its brand.
Our view is that housing market weakness is a bigger factor in our holistic view of each company’s credit risks. Last year, we lowered our ratings on both because of persistently high mortgage rates and low home sales volumes. Although Anywhere’s leverage approached 10x even before the NAR settlement, we still expect solid free operating cash flow (FOCF) to debt in the mid- to high-single-digit percents in 2024, plus it has nearly $1 billion of liquidity that provides significant flexibility and runway to handle a potential decline in agent commissions. RE/MAX’s liquidity is more limited, but we think its 4x leverage and similar FOCF to debt as Anywhere are sustainable at the rating through persistently low-volume home sales.
While Anywhere has a greater share of its revenue exposed to commissions, it operates at a larger scale ($5.6 billion revenue in 2023) than RE/MAX ($326 million), with a larger cushion to absorb commission income compression. RE/MAX’s protection against commission drops is its more diversified income streams from agent fees.
Today, our stable outlooks on both companies’ ratings signal our opinion that they have sufficient liquidity over the next 12 months to provide some flexibility and runway to manage a difficult operating environment. We think changes to commissions may amplify some downside risks in the longer term. We will monitor their strategies to manage those headwinds.
What related scenarios could increase downgrade risk for RE/MAX and Anywhere?
We think one scenario is reduced average commission rates on home sales. Buyer agent commissions could be constrained over time, and our view of the magnitude will evolve, depending on how consumers and agents adjust. Though there could be a temporary cash inflow benefit from reduced accounts receivable as revenues compress, less commission income on the table could shift agent-broker commission splits toward agents and reduce brokerages’ gross margins. In our view, average commissions are just one component that determines how much revenue brokerages make off commissions. It will take time for the industry to adjust.
A recent U.S. Federal Reserve study suggested total industry commissions could fall up to 30%. This could dampen revenues significantly for RE/MAX and Anywhere, with further potential for liquidity pressures from weaker cash flow.
For illustrative purposes, we estimate it would take at least a 10% drop in revenues from 2023, all else constant, for RE/MAX’s leverage to rise above our downgrade trigger of 4.5x. For Anywhere, margins would need to compress by 60 basis points alongside a 10% drop in revenue from 2023 to reach FOCF deficits.
Under what scenario(s) could this settlement be credit neutral for these issuers?
We think the rule change could have minimal impact on brokerages’ gross commission income. We see three reasons:
- Top-producing seller agents may still negotiate 5%-6% commissions. The buyer agent might take home less of the total, but the same amount is on the table for a brokerage to benefit, depending on which side of the transaction its agent sits. Agents and their sponsoring brokerages would flock to position themselves on the sell side. It’s possible more buyers go without an agent. At the same time, this opens opportunities for innovators to offer new ways to profit off the buy side by pairing high-quality, value-adding services with buyer representation or advisory services. Those innovators could be RE/MAX, Anywhere, other brokerages, or other actors that quickly fill a market need that arises from shifting agent incentives.
- Lower commission rates on homes could reduce perceived or real costs of homebuying, which would stimulate higher transaction volumes in the short term. In this case, brokerages would make less money on each transaction, but with more transactions coming out of the current down market, at least in the nearer term.
- Average home prices could increase if listing agents, with finesse, advise home sellers to set higher prices, essentially driving up average valuations to make up the difference on lower commission rates. Buyer and seller agents may cooperate, such as to preserve the compensation they expect from a particular sale.
How significant is the risk of lower average commission splits compared to other downgrade risks?
The most significant downgrade risks in our base-case are unrelated to commission splits. For RE/MAX, the key downgrade risk factor is a more aggressive financial policy leading to leverage above 4.5x and erosion of discretionary cash flow. For Anywhere, it stems most from margin degradation on a higher operating cost base, causing cash flow deficits or increased reliance on its revolver. We don’t view these risks as imminent given our view of management’s priorities for both companies. We expect RE/MAX will maintain relatively conservative financial policies to weather the down market and that Anywhere’s management team will continue to identify and execute on cost-cutting initiatives.
In brief, we don’t think lower commission rates will have a material near-term impact on brokerages. For RE/MAX, we focus on agent count as it determines its recurring revenue base because the company charges annual fees for agents to associate with the brand. Agent attrition or unfavorable changes to the way RE/MAX structures those fees could shrink that revenue stream. For Anywhere, we focus on how lower broker commission splits could pressure margins and, in turn, worsen liquidity. This matters for RE/MAX too, but less so because of its healthy fee revenue.
Beyond the next two years, the credit impact will depend on the evolution of brokerage gross commission revenues.
What are the key factors that affect brokerage gross commission revenue?
To understand the potential credit risk impact of industry practice changes, it’s important to recognize that brokerage gross commission revenue over a given period is a function of:
- Home sale volumes;
- Home prices; and
- Agent-brokerage commission splits.
It’s helpful to lay out some of the factors that influence this for a single illustrative home sale transaction.
| Brokerage gross commission income from a single home sale transaction | |
|---|---|
| Commission income drivers | Factors |
| Which side of the home sale transaction the brokerage’s agent represents. | Whether the agent represents the seller, buyer, or both. |
| Agent-agent commission split, i.e. the degree to which the split favors the listing agent over the buyer agent. | Individual agents’ negotiation skills. |
| Industry norms and practices. | |
| Local regulations or customs specific to a given state or geographic region. | |
| Consumer willingness to pay for representation on each side. | |
| Consumer awareness that this is negotiable. | |
| Agent-brokerage commission splits. | Competitive market dynamics between brokerages. |
| Brokerage strategy/policy for incentivizing agent talent retention and productivity. | |
| Individual agent’s productivity. | |
| Agent compensation model. | Whether the status quo model of splitting a commission persists or other models emerge, e.g., buyer agents charging by flat fee, the hour, etc. |
The pending NAR settlement casts uncertainty over the future of agent-brokerage and agent-agent commission split compensation arrangements. If the settlement is approved in July, we believe it will take considerable time for consumers and agents respond.
Related Research
- RE/MAX LLC Downgraded To 'BB-' From 'BB' On Elevated Leverage; Outlook Stable On Cash Flow And Profitability, Dec. 8, 2023
- Anywhere Real Estate Group LLC Downgraded To 'B' From 'B+' On High Leverage From Protracted Weak Sales; Outlook Stable, Oct. 31, 2023
| Primary Contact: | Ellie Price, New York 1-212-438-0257; ellie.price@spglobal.com |
| Secondary Contacts: | Nishit K Madlani, New York 1-212-438-4070; nishit.madlani@spglobal.com |
| Daniel Pianki, CFA, New York 1-212-438-0116; dan.pianki@spglobal.com | |
| Ben Hirsch, CFA, New York 1-212-438-0240; ben.hirsch@spglobal.com | |
| Andy G Sookram, New York 1-212-438-5024; andy.sookram@spglobal.com | |
| Research Assistants: | Valeria Morillo, New York ; valeria.morillo@spglobal.com |
| Gabriel Figueroa, New York ; gabriel.figueroa@spglobal.com |
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