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26 May 2008

Estate agents, time to change business model

Unsurprisingly estate agents are feeling the pain of the credit crunch, with 150 closing a week and monthly sales down from 14 to 7 properties on average. This is despite Scottish house prices continuing to rise.

The problem here is twofold. First of all with agencies closing, there is fewer competition for consumers and secondly the remaining competition will no doubt carry on with the same absurd practices which led their competitors to go bust on the hope that it won't happen to them.

When I received a quote from some local estate agents, I was alarmed that the rates they quoted of 0.75% and 1% of the sale price were at the lower end of the national average which according to this article is about 2%. Using the national average house price of £218,112 and the figures above, here's an estate agent income calculator:

1. Average house price = £218,112
2. Average estate agent commission = 2% = £4,362 commission
3. Average monthly sales = 7. Therefore average monthly income = £30,535

4 Estate agents per office average, average salary £50,000. Total wages bill approx £18,000. This means approx £12,000 per month profit to cover phone calls, office hire and so on.

Certainly in my case, advertising and other extras such as placement on websites, noticeboards and so on was paid for on top.

So what did I get for my 1% deduction on the sale price, according to the bill? "Professional charges including preparation of draft schedule, validated and printed, insertion of photo in local offices, placement on rightmove website and dealing with enquiries".

For that they get 1% of the sale price, and sole selling rights which mean:

"If missives for the sale of the property are concluded during the period in which the company has sole selling rights then the charges are payable even if the buyer was found by myself".

So basically the current estate agent model means that even if I find a buyer, they get to charge 1% of the sale price. Personally I think this is an undue benefit to the agent and as such possibly unfair (and therefore illegal and unenforceable) however the point here is that it's a huge commission when you consider the actual effort to achieve it. To sell a property for 400K for instance, there isn't a lot of actual effort the agent needs to do besides place adverts in papers and on websites and for that they get £4K+, something that I could employ a full time consultant for a week and still have spare change, yet the estate agent sits back for the calls and gets the money even if I find the buyer. Surely something wrong here.

This is essentially why so many agents are now going bust, and why so many went bust in the previous housing downturn in England in the early 90s. They are dependent on a very small number of very high profit margin sales and so they are extremely vulnerable to market fluctuations and in a quiet period, their profits can dry up very quickly indeed.

The solution naturally is to pay estate agents a proper fee. I would quite happily pay £100 to write a schedule and take photos. I would also, maybe, pay to advertise on websites although I think that the age of having to do so will pass in the next 5 years as more free listing sites emerge. I also don't mind paying to advertise in local papers if necessary or on a per viewing basis if the agent shows the house for sale. However, I object to paying £4K just for them answering the phone when I could do it myself.

So all in it should be perfectly possible to sell a house whatever its market value for a few hundred pounds + whatever extra marketing I want to pay for. The days of taking 1%, 2% of the sale price should be a thing of the past.

This of course means that estate agents have even less money coming in which means that they have to deal with a much wider customer base. Fair enough, I think that there are probably too many estate agents and if the numbers stay at their post-crash lows then this would be a good thing. By having more customers and a lower margin on each, they would overall make more money due to scale and also would be more immune to market fluctuations

e.g. selling 100 properties a month over a much wider customer base and making £500 on each means that the agent makes £50,000 per month rather than £30,000 and having the customers spread over a wider area means they are less vulnerable to local downturns. Incidentally £500 is the min fee that my agent charged, so clearly it is feasible at this level.

Am I the only one who thinks its time for a shake up in how house sales are charged?

Evidently not, see House Network. Any more like it?

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