Valuing Economic Loss for Realtors in the Current Realty Market

Posted on November 27th, 2024 in Construction & Real Estate, Loss Quantification

A mixed couple shaking the hands of a female realotor. Standing inside a empty house with with walls an no flooring.

In calculating the economic loss for an employed, or self-employed individual, we typically compare the person’s pre-accident potential earnings (being what they would likely have earned had the accident not occurred) to their expected post-accident actual earnings (being what they will likely now be able to earn, if anything, given the injuries they suffered in the accident).

Under relatively normal and stable economic conditions, the potential earnings are often estimated based on what the person was earning at the time of the accident, or perhaps based on an inflation-adjusted average of their pre-accident earnings. However, given the large fluctuations in real estate markets over the last few years, determining the potential and expected actual earnings for real estate agents/ brokers, has become more complex and difficult to determine.

Earnings of real estate agents are typically based on commissions on the sale price of the residential and commercial units sold. Over the past few years, the sales prices of real estate have increased dramatically. The resulting commissions on those property sales have also increased dramatically. Therefore, real estate agents are typically earning much more per home/unit sold now, than they did before these increases.

A real estate agent injured in an accident likely can’t work to the same extent as they could before their accident. Therefore, they have likely suffered a loss due to the accident because they are selling fewer homes than they were before the accident. However, because their commission income per home/unit sale is now much higher, their income may not have actually decreased, even though they are selling fewer homes. That is, had they not been injured in the accident, they likely would have sold more homes/units than they did in their injured state, and thus, they have suffered a loss, even though they may have earned as much, or more, income than they did prior to their accident.

To add to the complexity, real estate agents have also experienced somewhat inconsistent sales volumes with the interest rate increases that began in March 2022, and remained at higher levels until the recent decreases in the middle of 2024. Other external factors may also apply, with the number of homes sold throughout the Golden Horseshoe area fluctuating significantly over the last few years. For example, the annual number of residential sales in the Hamilton area increased by about 8% in 2020, and almost 14% in 2021, before decreasing sharply by about 33% in 2022, and a further 15% in 2023. Based on this, it would likely not be reasonable to assume that any specific real estate agent’s sales would have remained constant throughout this period. Rather, it is likely that their number of sales would have fluctuated somewhat consistent with the market. We need to consider these fluctuations in estimating the person’s potential earnings.

Based on the above, when estimating a real estate agent’s potential earnings during this period, we would want to consider both the change in real estate prices (and thus commission income) and the fluctuations in the market. We can then compare this to the actual number of units sold, and income earned, by the real estate agent to estimate the loss suffered due to their injuries.

Ultimately, calculating the value of lost employment or self-employment income for economic loss purposes is a complicated issue, with each case presenting its own set of unique challenges. Our Financial Services Advisory Team (FSAT) has significant experience preparing these calculations. If you have any questions or require assistance with a calculation, please contact a member of our team.

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Article originally published in: FSAT News: Fall/Winter 2024