THE BLOG

Traditional Estate Agency Is Fundamentally Flawed

28/10/2014 13:08 | Updated 27 December 2014

Channel 4's new property show, Sarah Beeny's How To Sell Your Home, is doing a fantastic job of educating the public about the benefits of selling their home online.

I thought it important, however, to go one step further, to reveal exactly why the high street agent is a broken model and as such, a genuinely bad choice for homeowners looking to sell their properties.

There are so many things wrong with estate agency in its traditional form and so many ways traditional agents are exploiting unsuspecting sellers, that it's hard to know where to start. But here is my attempt...

1. The fundamental problem in estate agency is not necessarily the fee, but the fee structure; it's the "no sale, no fee" structure that actually leads to the exorbitant fees.

One estate agency office will typically carry out 100 'free valuations', list 50 for sale, and then sell 25. And that's only if you're an 'average' estate agent.

So on average, only 25% of people who use an estate agent's services actually pay for it. And not only that, but they essentially end up paying the bill for the services offered to the other 75% of homeowners whose sales are unsuccessful through that particular agent...

This is such a flawed business model; I don't think people expect to pay nothing when a service is provided. And marketing a property incurs costs, which customers are happy to pay for.

2. Staff commission earned on selling the property is another issue. The ultimate reason for instructing an estate agent is to find a buyer and achieve the best price possible. With such huge fees involved in selling property there is obviously a strong motivation to sell the property and at a high price. But unfortunately, when considering what an agent is ultimately employed to do, this is to the detriment of the seller. I'll elaborate...

All too often, a property is listed at £325,000 (for example), with a traditional estate agent earning £6,240 (based on 1.6%+VAT commission) if they achieve the asking price. A handsome fee, indeed.

So; a few people view the property and an offer comes in at £300,000. At this price, if a sale can be agreed, the estate agent's fee becomes £5,760 - a difference of only £480 from achieving the asking price (but a difference of a whopping £25k for the seller). The real incentive for both the individual 'negotiator' and the company is to 'close the deal', because, quite simply, they only get paid when they sell the property. Which means there is intense pressure on agents to agree a deal.

If the buyer is not willing to increase the offer, then more often than not, the agent will use every trick in the book to persuade, cajole, encourage and sometimes even bully the owner into accepting an offer that they perhaps don't really want to accept.

In no way, shape or form is this acting in the best interests of the customer. It is highly objectionable and is a fundamental flaw in estate agency.

Perhaps agents should be paid only on convincing a seller to list their house with them and secure commission only once they have achieved, say, 99% of the asking price? Online estate agents such as Hatched.co.uk, are incentivised to sell every property, with a minimal completion fee at the end of the sales process. Online estate agents, in fact, claim to sell properties on average at 99% of the asking price, whilst the national average for high street agents*, is 96%-97%. Further proof, that the traditional model is not benefitting the customer.

3. Then there's the geographical coverage... Many estate agents typically only cover one town, perhaps two, sometimes three. Either way, it is usually somewhere between 15,000 and 20,000 'chimney pots' worth of 'stock'. This is absurd considering that agents can easily sell properties way beyond their 'core area' using the property portals. Another factor that essentially reduces opportunities and choices for buyers and sellers.

4. And what of the absurd levels of high street dominance! There are far too many estate agency offices in the UK. For argument's sake, let's take supermarkets for example; the largest five or six in the UK have, between them, less than 10,000 stores nationwide. Compare that with estate agent offices and there are thought to be up to 20,000 shop fronts across the UK. It's crazy. Especially when considering that people sell their homes, on average, once every 6-7 years, yet those same people go to the supermarket 6-7 times per month! Why are there so many estate agents? The simple reason is that they are profiteering from sellers, because it is such 'easy money'.

5. Lastly, is the issue of investment in print media. Everyone knows that it is the internet and the property portals that sell houses nowadays. So why do agents continue to waste thousands in local newspapers and glossy property magazines? With the majority of leads generated online, it certainly doesn't benefit the client or an individual property. The only party that truly benefits is the estate agency itself, which achieves exposure in the local press and more importantly, presence alongside all of its competitors.

In this world of high speed communications, ever changing technology and an online market place, it's bizarre to think that the only industry that hasn't moved fully 'online', is estate agency. And that's even when a giant website like Rightmove is one of the most visited sites in the whole of the UK...

The only logical conclusion that can be drawn from this examination of traditional estate agency is that it is, indeed, a severely flawed model and unless it moves with the times and puts the customer at the centre of all its processes, can only, inevitably, be heading for failure.

But there is a wind of change coming. And it's in the form of online estate agents, who charge fairly for the work that they do; who don't pay commission to staff for selling houses but rather base their (reasonable) fees on things such as great customer service; who cover the whole country; who don't waste money on print media; and who, ultimately, work for the benefit of their customers, the homeowners, rather than working to exploit them.

*According to Hometrack - an independent house price analysis company