Estate Agency Fees Debunked.

The world’s oldest profession is prostitution. Similarly, the world’s second oldest profession is probably estate agency.

People have sought housing since the days that we clambered around in huts made of animal skin and phlegm and therefore it follows that there would commensurately have been purveyors of said dwellings from an early stage in our existence. Picture a stone-age spiv in a yak cloth somewhat shinier than everyone else’s.

Since this dawn of property merchanting, the fee methodology for such malarkey has remained the same and predicated around a percentage of the asset value and ‘on success’ rather than based on a service level or an amount per hour, a subject that I spoke to Evan Davies about here on Radio 4 last year.

Incumbent estate agents to this day still charge their customers in the same way, known as ‘no sale-no fee’, which sounds just great in that you don’t pay if you don’t sell.

The reality though is that an estate agent is not always in total control of the likelihood of a sale and which is obviously market and price dependent. In other words, if the seller insists on a high price relative to actual value especially if the market is weak, the property won’t sell easily, or at all. Which means that those that do sell pay for the wasted work that goes into the properties that don’t. Which isn’t fair given that across the country year in year out, the RICS statistics state that most homes marketed via conventional property firms do not sell.

The bigger issue here though is this question of percentages.

Until recently the London housing market had been ballistic in its value rises and these hikes touched 20% per annum in some parts during 2014. Accordingly, London estate agents saw their fees and therefore their incomes rise by 20% too even though, ironically, price rises are a consequence of more demand and therefore easier sales and requiring less time on the market. In short, less work but for more money. Can you think of any other profession that works on the basis of trying less hard and earning more?

This just doesn’t add up as far as Johnny and Jenny Consumer are concerned. Especially when you consider that complaints against estate agents to the Property Ombudsman, the main overseer of the industry, are at a record high.Perspective check – quicker and easier deals; continuing poor service but for a sharply rising cost to the consumer.

Now, to get all Freakonomics on you…

The establishment flag wavers defend themselves on the question of percentage fees like this: ‘We are incentivised to get a higher price and to work hard for you  and that’s why percentage fees are best’.

Here’s why such a contention is bollocks.

Using London as an example once again, the average Foxtons fee according to their own accounts is £13,000. Each Foxtons negotiator earns a typical 10% take in commission but there are lots of Foxtons employees and they don’t do that many deals, in fact they achieve just 8 completions per branch per month (their own numbers, not mine. See here) and therefore four negotiators per office are scrambling to do just two sales per month each.

The reality of such a low volume, high reward per transaction methodology (the Foxtons model plays out in principle across the whole industry) is that every deal counts and counts a bit too much perhaps. What do I mean? Well, imagine that you’re earning a £10,000 basic and desperately need your two commissions to make ends meet every pay-day. Faced with a buyer making an offer of, say, £650,000 on an asking price of £675,000, is your reaction to potentially lose the sale by playing fast and loose with the buyer, staring them out to see if you can squeeze the last drop of cash from them on the deal, risking them walking away and you being left with nothing? Or is to to know full well that  your commission on £650,000 is £1300.00 and your commission on £675,000 is just £1350 and therefore you focus on a ‘deal at any price’? (For the pedantic amongst you, Foxton’s standard fee is 2% and so my calculation is based on 10% of the 2%).

Take out tax and NI from the £50 difference and you’ll see that an estate agent working on this percentage of sold price remuneration method, really couldn’t give a toss about getting you that additional £25k. It’s simply not worth their time and effort. It’s easier to convince you to take the low-ball.

Now that I’ve lifted the lid on the undeniable disadvantage of the traditional agency approach I do hope that this article provokes reaction and debate from the incumbents that have for so long defended their fee structure as beneficial to the client when it really is of benefit to just themselves and their own profitability.

Now, fixed fees… are clearly a winner for the consumer, a proposition eMoov has advanced since 2010. The home seller is, after all, more in control of their transaction than ever before whereas the estate agent has far less power over information on values, time to sell, sale price vs asking price etc thanks to the Internet and therefore the seller is, I say, more responsible for whether and how quickly their home sells. The estate agent is now a mere conduit for a sale transaction, a guiding hand through the process (no prostitution insinuation implied) and whereby communication and efficiency of service are all important. Plus, of course, an expert in negotiating on the sellers’ behalf. This moving process job is not exactly astro-physics though and should not command a rate accordingly. And the cost certainly shouldn’t be pegged to the rising cost of the asset alone. Can you imagine Starbucks charging you for your hazelnut latte based on your salary? Or a cab driver asking to see your bank statement before he told you the fare?

It’s time for a better estate agent. And a fairer one at that.

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