The Fundamental Flaw at the Heart of Estate Agency

(And how to tackle it)

 

The old guard of estate agency may often be heard state “don’t negotiate on fees”. This is an understandable approach where most agents have little defensibility to their businesses. However, it is the wrong attitude.

Negotiating on fees isn’t a problem; it’s how estate agency fees are structured in the first place that is the problem

Negotiating on fees isn’t a problem; it’s how estate agency fees are structured in the 1st place that is the problemClick To Tweet

 

Background

This matter goes to the heart of assessing whether the offline or online model is “correct.” As we explain below, then in respect of estate agency fees today, it seems obvious that even the new breed of online agents cannot ever truly be loved by the public.

Now, the clamour of people pointing to Trustpilot’s unbelievably positive ranking of Purplebricks is deafening at this point. But hear our argument out.

We contend that the rise of online agents is more about innovation than true disruption, which is the subject of a future blog, but perhaps true disruption ought to come from a different approach to fees.

Traditionally, agents have sold properties for a percentage of the final selling price. No upfront fee, just a commission on success. That makes sense in broad strokes but the question has always lingered – is the agent truly incentivised to push for an even higher price on behalf of their vendor?

Are estate agents truly incentivised to push for higher property prices?Click To Tweet

Take, for example, a £200,000 apartment in any regional city. With an average fee of 1.3% (according to Which) that is a gross income for the agent of £2,600. If the sales price is £190,000 then the fee is £2,470 and if the sales price is £210,000 it is £2,730. That is a range of £260 – hardly the difference between life or death for the business. Indeed, this is amplified by the fact that the individual responsible for handling the sale – namely the negotiator in branch – is likely to be on no more than 10% commission (at a generous agent), meaning the marginal difference between achieving a sale price of £210,000 versus £190,000 is £26. Hardly motivational, even assuming hard cash is why they go to work in the first place!

The online agents have a different approach. They are paid on listing, not on a sale. While their fee is lower than traditional agents, the consumer must then accept the fact that the agent is not necessarily incentivised to sell the property at all. Once the listing is taken, that is job done. Cash banked, as it were.

 

Misaligned Incentives

Regular readers of these musings will know that we are students of Freakonomics and won’t be surprised to hear that this issue has been covered in great detail here.

It will be even less surprising to hear that the Freakonomics authors concluded that the traditional commission based real estate model doesn’t incentivise agents to achieve the best price. We further contend that the new breed of agents is even less incentivised to do so.

In the traditional agency world, the difference between significantly higher or lower sales prices is often immaterial to the agent. In the online agency world, achieving a listing is what matters, not selling a property.

This misalignment of incentives is the fundamental reason why people distrust estate agents. Sellers want to achieve the highest price for their property as quickly as possible. Neither model is structured to achieve this.

This misalignment of incentives is the fundamental reason why people distrust estate agentsClick To Tweet

The Solution

So, how can it be fixed? Simple.

Eventually, a market participant will offer a fee structure that aligns incentives. In broad terms, this will have three criteria:

  • A very low (or zero) listing fee;
  • A sales price set by the vendor; and
  • A 50/50 share of upside, between agent and seller, over and above that asking price

In this scenario, everyone’s incentives are aligned. The seller doesn’t have to pay to list but is encouraged to be realistic with their asking price because they will want their agent to work hard to sell their property, while the agent is encouraged to work hard for the best sales price for their client due to the potential for much greater fees.

Nested are close to getting this right, but the fundamental issue with their model is that they are incentivised to bring properties to market at a below-market-value price. This is still a misalignment with vendors.

It seems clear that online agents, with their historic data, should be best placed to build a pricing model that ought to mean greater revenues than they achieve today, but even a traditional agent could take significant market share by adopting this approach.

What do you think about the potential for something as simple as new fee structures to disrupt agency? Let us know below.

Download a PDF or this article here.

Recent Posts
Comments
  • Paul
    Reply

    Whilst I agree with the premise that fees don’t incentivise getting best price (they never have) I think the 50/50 share of an uplift option is not workable.
    1. Vendors will not want to instruct without knowing what they’ll pay in fees (I’m not sure it wouldn’t go against the OFTs requirements of clarity of terms of buisness and fees as well)
    2. Vendors will put too high a price on to ensure no possibility of uplift ergo they won’t sell and/or the agent won’t get a fee.
    3. Vendors do achieve an uplift but it’s ahead of market value, the lenders valuation falls short, the sale falls through and the agent won’t get a fee.
    4. To avoid any of these scenarios the agent is firm on pricing and the system still fails in incentivising best price.
    I wish I could comment more positively. The system and the market make properties difficulty to quantify with precise accuracy and for that reason there is no perfect solution

Leave a Comment

Contact Us

We're not around right now. But you can send us an email and we'll get back to you, asap.

Not readable? Change text.