PROPTECH-X ‘Proptech & Property News’: Is Proptech science fiction for property practitioners? | What future now for online estate agents?

Is Proptech science fiction for property practitioners?

Back in the mid 1980’s when I got into realestate as a practitioner, I was at that time an avid reader of science fiction. My favourite book was ‘Machines that think’ a compendium of short sci-fi stories, about future worlds, with a forward by the famous author Isaac Asimov.

Though it was published in 1984, many of the stories had been written in the 1940’s and 1950’s and described future utopian or dystopian worlds full of new technology and the role of artificial intelligence, robots and data.

Fast forward to now and many of the advances that the sci-fi writers had predicted 70-plus years ago are now part of this world. And within the property sector there is now Proptech – property technology or some I call it science fiction for property professionals.

Hard to define, Proptech is a vast sprawling vista of different new technologies operating within the sphere of property, it is not just digitization, it is re-imagining and interconnecting all the strands within the sector. It covers property, its design, planning, build, sales, renting, asset management, and the way in which humans interact with property.

Where the customer or end user’s experience can be analysed, distilled and digitized into a solution which enhances service levels and the experience of the consumer, hopefully driving a profitable outcome for the owner of the technology.  

It could be a property with sensors – a talking house or providing seamless systems to replace archaic systems within estate agency, in fact a big problem in Proptech is seeing the wood for the trees and knowing which technology will succeed and which will not.

Proptech is many things and covers many technologies including; – Deep Learning, Artificial intelligence, Big Data, Intelligence Augmentation, The Internet of things, Machine Learning and Blockchain. The driver is to use data to streamline processes and deliver maximum revenues. (Note that many of these terms would not look out of place in one of Isaac Asimov’s books, I Robot.)

Just as Fintech exploded onto the scene in the past two decades, where massive amounts of money were invested into Financial technology, Proptech has seen similar of investment, in both the UK and the rest of the world. Though since the SVB debacle investment sentiment has of course weakened.

The big problem is that many UK property practitioners see Proptech or the vertical of digital transformation that applies to them as Sci-fi. They are very conservative, and slow moving to make changes to their businesses, simply put they fear change. They feel bamboozled by the terminology and the complexities of this new technology, it all sounds a bit costly, and it is not too certain how they can change their operations.

Which is a shame because all stakeholders would benefit from automating the dull boring administrative type parts of their businesses, their property management systems. But that is just baseline stuff, as now with AI and ML meaningful new patterns of how we work and utilise commercial assets is becoming clearer. We can begin to digitally re-imagine the new worlds of the future.

In the mid-1990’s I was an advocate of early Proptech using bespoke software packages which was the forerunner of many operating systems, which themselves are now seen as legacy systems. I realized that a salesperson using the system was worth two ‘pen and paper’ salespeople, because a lot of the repetitive work was taken out, and databases allowed quick matching of buyers to properties, and speed in commerce is always vital.

For me the Proptech revolution is offering its hand in partnership to ‘forward thinking’ companies. Creating a way of trading akin to Amazon where the customer experience is put front and centre. Some companies have fully grasped that outstretched hand, and are building towards a utopian UX, others sit and wait.

And I wonder why? As now business in the property sector can be based on captured data and analytics which provide a clear narrative of what the customer likes and wants. So, a personalized service, with real user functionality.

The biggest reason to engage and adopt ‘Proptech – science fiction for property practitioners’ is the unstoppable rise of the Millennials (born in the late 1980’s and 1990’s) who now sit in positions of power. These are fast becoming the volume property industry clients, and they form the digital technology generation, which Wikipedia ominously states are ‘comfortable with Internet and Social media’. Now that is an understatement.

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What future now for online agents?  

‘By 2020, traditional estate agents will be dead, and online estate agents will sell half of all property in the UK’. 

This was the heading for a piece I wrote back in Oct 2017. Given we are at a watershed moment with the fortunes of Purplebricks – we reprint the article in full. Many of the onliners in the original article have ceased trading and others have come and gone or rebranded.

This is a common enough headline (by 2020 traditional agents will be dead) and I thought so too, until I looked at the facts and realised; no online agent is making a profit, many online agents are propped up by large, regular injections of fresh capital, and the mature online estate agency model has no asset base and so no brand value.

Now suppose you want to start a brand new traditional estate agency, how much profit will it make and when? and how much does it cost to set up and run?

Here are the figures; it costs 30k to acquire premises and kit the office out and have all the IT hardware, systems, and office furniture in place. Then it costs 18K a month to cover the overheads, for a team of four-sales people and their salaries, cars, website costs, and all other costs to run the office and sell properties.

A traditional agency trading 50-miles from the capital will then market and sell property in all price ranges, mostly from £200,000 to £600,000, and as the brand matures they may specialise in both the mid-range and the top end range £800,000 to £1.5M. On average they sell property at an average price of £360,000 and they charge 1.1% plus VAT, or around £4,000 plus VAT, £4,800 in total on a no-sale, no fee basis. 

In the first 12-months of trading – Year One – if they sell a property day one, the cheque for the completed sale arrives five-months later, and as they spend the first month getting property stock on the market, it is in their second month real sales begin. So, after six-months of trading they have spent 30k on setting the office up and 108k on running costs, that’s 138k, and probably they have received only 5k in on commission from completed sales.

Over the next six-months their outgoings are another 108k, and the commission from completed sales dribbles in, plus VAT, at a rate of, 5k month six, 7k month seven, 10k month eight, 12k month nine, 14k month ten, 18k month 11, and 20k month 12, total 86k. So, 236k spent out, and 86k cash flow in. Profit; what profit? there is no profit, they are now minus 160k for the first year.

Over the next 12 months – Year Two – office costs are 19.5k a month, and income from completed sales is 26k a month. So 234k spent out, and 312k cash flow in. Profit; 78k for the second year.

In the next 12 months – Year Three – office costs are 20k a month, and income from completed sales is 28k a month. So 240k spent out, and 336k cash flow in. Profit ; 96k for the third year.

And more importantly at the end of year three, true break-even is achieved, all the start-up capital, that £160,000 pumped in and ‘lost’ in year one, has been repaid and from here on in they have a profitable business standing on its own two feet, with no need for further injections of capital to keep it trading.

So, 160k ‘loss’ (start-up costs) in year one, plus the 78k profit year two, plus the 96k profit year three, means a 14k surplus on the venture after 36-months.

In next 12-months – Year Four – office costs are 20.8k a month, and income from completed sales is 30.8k a month. So, 250k spent out, and 370k cash flow in. Profit; 120k. So on a turnover of 370k generated solely from commission in from completed sales, a gross profit of 120k, or a 23% profit margin. By year ten gross profit could be 400k.

Now on this example I have purposely, not fed in the other revenue income streams, revenue from mortgages, life cover etc, because in the start-up phase, a lot of these income streams are neutralised by the start-up costs of an extra member of staff and new equipment, IT etc.

For instance, a mortgage advisor costs 40k to sit in an office, and will take a year to cover his basic cost, earning no profit, but in year three of doing business they might generate 80k of profit, similarly an estate agency might set up lettings, again it will not become profitable until it has 40-properties let and managed, and so it will produce a negative cash flow for its first period of trading, but in year ten could generate 250k of profit.

In a mature 10-year model, financial services can add up to 40% gross profit to the business annually and lettings can add 30%. So, if in year ten, selling property generated 400k gross profit from commission from completed property sales, moving on from the 120k of year four, then financial services would add 160k gross profit and lettings another 250k gross profit, plus solicitor introductions, re-mortgage business, new homes, so a  total gross profit for the one office 800k plus.

Now, if you opened 10-cold start offices, two would not make great profit, two would make super profit and the rest would be a mixed bag, due to local competition, lack of a good sales team etc. But, in the real world, statistically a 10-office cluster of agents will constantly generate at least a collective 2.4M gross profit, which ties in with the notion that a single office in year seven of its development should produce a 234K profit. 

Having looked at the traditional estate agency model for generating wealth, there are three other important factors at play; most ‘traditional’ estate agents only charge a fee on exchange of contracts, so on a no-sale no fee basis;  nationally, 50% of all the property that an estate agent lists (takes to the market) in a year they fail to sell; estate agents get paid huge commissions which is unfair.

The no payment until the job is done means that the agent is highly motivated to find a buyer; otherwise all the marketing costs are lost. Also, as their agency agreements are time specific as time passes, estate agents are more and more pressured to find a buyer before the vendor goes to a second agent.

The fact that half the property stock does not sell means that the fee charged by the agent actually covers, all the cost of the sales of the property that have exchanged, and all the cost of the properties they listed and failed to sell.

So, list two properties, sell and exchange on one, lose the other, and the fee from the sold one covers the marketing costs of both, plus profit margin. Interestingly, of the 50% of properties that are not sold by the first agent, over 60% of these are sold by the next or third agent instructed, so over 80% of property does get sold if it stays marketed.

So, as an example if an estate agent generates 320k of revenue excluding VAT in a year, just from completed sales,  that is, 80-completed sales at an average fee of £4,000 plus VAT, which is around 1.1% plus VAT of a 360k property sale price. This £4,000 plus VAT fee is in fact covering the cost of selling the property and the cost of marketing another property that was never sold, (one of the dead loss 50% which they lose to the second or third agent).

The old chestnut that the agent gets paid a huge commission is debatable. Individual sales people may get a 5% or 10% commission of the fee, which is a huge incentive to sell the property, but their basic salary will be at a low level, and they will usually work at least a 50 to 60-hour week, and they will in the main be extremely skilled in their profession. 

So, if you start to work out their hourly rate, factor in their low basic salary and then factor in they earn commission at a rate before tax of either 5% gross of the £4,000 fee, so that’s  £200, or 10% gives them £400, they are not going to be buying a yacht anytime soon.

Also, I have illustrated that the onerous office costs month in month out, also mean that many managers or owners earn a reasonable amount, but again there is little fat in the business. The vagaries of the market, government intervention on stamp duty, general elections, etc, can often skew trading patterns, so with a good team a mature estate agency might trade on a gross profit of 30% plus. But many agents trade on a margin of less than 10%, despite being number one in their areas, which is not indicative of inflated commissions being charged. 

Now, suppose you want to set up an online estate agency, how much profit will it make and when? And how much does it cost to set up and run?

To my knowledge no online estate agency has yet made a penny profit as of October 2017, and some have been trading over eight-years.

So, I am going to look at Purplebricks (UK), to illustrate the online business model and give an insight into how they trade, as from what I can see all online models are a variant on this company. Purplebricks (UK) or (PB) is less than three years old, and follows in the footsteps of Hatched and Tepilo some of the original trailblazers which were created five-years or more earlier.

(PB) ‘the property market disrupter’ are by far the biggest online estate agency, claiming they will make a profit of around 6M in 2019.  At present according to Rightmove, they nationally have over 28,000 properties listed online, over 16,000 for sale, and 12,000 under offer, an impressive tally. Though not profit making, they dwarf the online opposition in the number of properties they have online. Their share price is through the roof, as they generate a huge amount of cash through put, but no profit has ever been made.

(PB) charges £849 including VAT, to list your home, and £1,199 including VAT in London, and their intention is to sell the property, but the fee is fully payable should the property fail to sell, unlike the traditional estate agents no sale, no fee proposal.

On the surface the business model is low cost with many traditional estate agency elements stripped out, such as no bricks and mortar premises, and it is front end cash generative. There are no dedicated employed sales teams, as per the traditional estate agents, instead they have instruction getters or listers, termed Local Property Experts, (LPE’s) who are self-employed, and receive a commission per instruction listed. They then earn additional commissions from selling add on products and services such as; accompanied viewings, conveyancing leads and financial services etc.

A big part of their business model apart from the ‘low fee’ is that they advertise they do not charge a commission, just a fixed low fee. Well given that the LPE’s get an instant commission somewhere in the region of £400, per property listed, a fixed percentage of the overall fixed fee charged to the vendor. This model strikes a strong chord with the traditional employed sales person sitting in a cosy office being paid £400 commission for a successfully sold and completed sales transaction.

I wonder if vendors are aware that the nice young lady or gentleman sitting in front of them stands to personally earn an instant – £400 of the £900 plus VAT fee they are charging each time they get them to sign to sell, (even if the property fails to sell). I also wonder, and I know there is a Gig economy vibe out there, but will the tax man soon think these 450-people are really employed, rather than self-employed?

Who knows, what is public record is that in the financial year ending in 2016, they had 200 self-employed LPE’s, (based from home – remember no offices), and in the financial year ending in 2017, they had 450 LPE’s, each on average earning a commission of just over £40,000 a year, from listing on average just under eight-properties a month, (96 a year), that’s a little over £400 on average per vendor sign up. 

In terms of initial funding, in 2015, (PB) raised £25M of funding on the Alternative Investment Market to grow the business, and in 2017, despite making no profit, raised an additional £50M to fund the growth of the same business model in America, launching in California.

In its second year of trading, which ended earlier in 2017, (PB) had generated £46.7M of revenue (positive cash flow), but that £46.7M revenue, still delivered a £6M loss for the same period. Following on from a £12M loss delivered the previous year, so an overall loss of £18M.

Had the company gone the traditional route of injecting 160k seed capital in year into cold start offices, this could have started 112 branches using the £16M they have already lost. Producing a positive cash flow after year two of over £8.7, and a positive cash flow of £10.7M after year three, and a true profit (not cash flow) of 112 branches at 120k profit a piece = £13.4M profit in year four.

Easyproperty trading since 2015, two-years, has made a trading loss of £16M in that period, and at present have according to Rightmove, nationally only 101-properties online, 78-properties for sale and 23-under offer. The company is being funded by shareholders, where £24M has been raised to grow the business.

Had Easyproperty gone the traditional route of injecting 160k seed capital in year one into cold start offices, this could have started 100 branches using the £16M they have already lost, with a positive cash flow after year two of over £7.8M, and a positive cash flow of £9.6M after year three, and a true profit (not cash flow) of 100 branches at 120k profit a piece = £12M profit in year four.

YOPA trading since 2016, two-years, according to Rightmove have nationally over 2,700 properties online, over 1,600 for sale, and 1,100 under offer. I could find no company accounts to assess their trading position, but I assume they are making a heavy loss, as they have received £36M for shares in the company from the LSL property group and Savills in 2017. Again 36M invested in the traditional model at 160k a go is 225 cold start offices, which in year two would generate a positive cash flow (not profit) of 225 x 78k = £17.55M, and in year four £27M profit.

Tepilo trading since 2009, eight-years, have nationally over 1,700 properties on line, over 1,100 for sale, and 600 under offer, according to company accounts as of mid-year 2016 the company’s net worth was 100k. I could find no financials on how much money has been poured into this company, but my guess if they could certainly have funded a fair few branches, which in year eight of trading typically produces 280k of profit per office.

Emoov trading since 2010, seven-years, according to Rightmove have nationally over 1,800 properties on line, over 1,200 for sale, and over 600 sold. According to company accounts, as of mid-2016 they were not making any profit, but they have received over £9M funding from major private donors. Again £9M invested in the traditional model is 160k seed money put into 56 cold start offices, which in year four would generate 56 x 120k = £6.72M profit. In year seven, with an average profit of 234K per office, the total profit would be 56 offices x 234K = £13.1M profit.

Housesimple trading since 2011, six-years, according to Rightmove have nationally over 3,000 properties on-line, over 1,900 for sale, and over 1,000 sold, with over £13M invested by private investors. Again £13M invested in the traditional model is 81 cold start offices, which in year four would generate 81 x 120k = £9.72M profit. In year six, with an average profit of 195K per office x 81 = £15.79M profit.

Hatched trading since 2011, eight years, according to Rightmove have nationally over 1,000 properties on-line, over 600 for sale and over 400 under offer. They lost over 500k in 2016, having been bought out in 2015 by Connells, who are now supporting the on-going losses. That 500k, plus the losses of 2017 and initial price to buy the company might top £1M, which again invested in the traditional model would be six cold start offices which in year four would generate 6 x 120k = 720k. In year six, with an average profit of 195K per office x 6 = £1.17M profit.

Apart from not making any profit, the real impact of the online agencies on the housing market is limited; as they  now collectively list only 6% of the entire property stock being sold, (with (PB) having 70% of that 6% market). So, traditional agents still have a whopping 94% of the total annual £4.4BN property marketplace.

I have looked at the fact that on-line agents do not make profit, yet we all know their running costs are low so surely they must be making some profit?  Well the answers may surprise you.

If you go on-line today and search the online agents on Rightmove, you get a snapshot of their performance, that is everything they have listed for sale and sold, it is not a years’ worth but it probably is a good indication of their current cash flow, for around five to six months; because unlike traditional estate agents who only charge on completion and only sell half their stock, online agents work a different way – to make their ‘profit’.

So, you use an online agent and typically you pay upfront an average cost of £700, as a fee (plus VAT), you pay this even if the property does not sell, there is no no-sale, no fee here.  Now there are also, upfront add-ons on services for each online agent, accompanied viewings, etc, so let us say each client is paying up front £700 plus £200 in extra add-on services, so £900 (plus VAT) and we take this to be the average standard online price paid by vendors.

So (PB) has 28,000 properties listed on Rightmove, in October 2017, at £900 a time that is over £25M of positive cash flow (secured revenue.)  Remember, It makes little difference if they are sold or not, as each unit has the same value, the upfront fee. Which means over a twelve month period it is likely to generate over £50M of cash flow.

So, if we look at the other online contenders, and their specific amount of properties listed on Rightmove in October 2017, and we double it in every case, and multiply it by the £900 average online fee, it will give a rough 12-month forecast of cash flow.

Easymove has 101 properties listed, at £900 a time, that is £90,900 cash flow for 6-months, £181,000 for the year.

YOPA has 2,700 properties listed, at £900 a time, that is £2.43M cash flow for 6-months, £4.86M for the year. 

Tepilo has 1,700 properties listed, at £900 a time, that is £1.53M of cash flow for 6-months, £3.06M for the year.

Emoov has over 1,800 properties listed at, £900 a time, that is £1.6M of cash flow for 6-months, £3.2M for the year.

Housesimple has 3,000 properties listed at £900 a time, that is £2.7M of cash flow for 6-months, £5.4M for the year.

Hatched has 1,000 properties listed at £900 a time, that is £900,000 of cash flow for 6-months, £1.8M for the year.

Remember, the figures above are only cash flow figures, not profit figures, the running cost of each venture has to be deducted from each of the totals, which I do not have access to. But, given that (PB) made a loss last year of £6M, and yet had a positive cash flow of over £47M in that time, and it dwarves the cash flow of it opponents, it becomes obvious that, none of their competitors are likely to be making a profit in 2017.

More far reaching is the fact that the operational costs of online agents are strangely high.  In fact (PB) are only predicting their first profit in 2019 – around £6M (a 7.5% margin). If, and it is a big if, their cash flow rises 170% from £46M in 2017, to £80M in the next two years.

Whatever happens, surely on the face of it online agents, must be cheaper to run than traditional agents, given they have no premises, no rents, no rates, no utility bills, no sales staff, yes they may have LPE’s (but no large sales team, instead buyers are introduced by Rightmove and Zoopla). So, probably it is just a matter of time before these low overhead online agencies clean up?

Well no; think about it, the online estate agency sector is only 6% of the total market, so no-one knows about them, so they are spending millions on advertising their brand, rather than spending millions on the properties they are listing; so that’s millions pumped into television, online, radio and other advertising just to buy brand awareness.

So unlike the traditional agents whose main budget is used to promote the property stock they represent, sell property, the new online agents are throwing vast sums into media and  self-advertising their brand, any guesses what Purplebricks, Yopa and Easyproperty television commercials cost a year – yes, that investment would fund a whole division of cold start traditional offices opening up.

Put another way, when did you last see a television commercial for a traditional agent? Well they are pretty rare to non-existent – why?  Because a campaign of television commercials, radio coverage, press and online campaigns can add up to a monthly spend topping £1M. With no offices, and the only visible sign that an online agents exists being their for sale or sold boards; without massive on-going advertising campaigns fuelled in this expensive way, online agents are invisible. Which is why last year one online agency spent in excess of £8M on brand awareness, the same as opening 50 cold start offices, at 160k a time.

Will in time this huge spend change? Maybe, but how long does it take to establish a brand in the estate agency world, I think ten-years, and really it is only after 30-years that agents really have a deep rooted advantage of being ingrained in a prospective vendors mind. Sure, huge sums spent on brand awareness help, but I think the online agents will have to continue campaigning this way for some years yet.

So, in a nutshell, online estate agents are great news, for media executives, and for the vendors who list their property realistically and have a desirable property, as they will get it sold and pay £900 plus VAT. But I think only 50% of online vendors achieve a sale, that goes to exchange this way. The same ratio as estate agents nationally; and so that is a lot of vendors paying out £900 + VAT and then paying a second fee, probably to a traditional agent to actually sell it.

But, the real kicker is that the daddy of the online agents (PB) is only successful, at achieving sales at an average sale price of £240,000, as stated recently by their chief executive. Not much use to the tens of thousands of vendors with property worth considerably more. So this means the traditional estate agent, who caters for property across the broad spectrum of property sales prices, still has the major marketplace; just think of London selling prices.

Which is why in expensive villages and towns and some cities the established 30-year old agency (or 200-year old agency) with many time served sales staff, will be the first agent out to list that 500k to £15M property gem. Again looking on Rightmove there is a definite polarisation between the market share of established ‘good name’ estate agents whose business model is founded on decades of service and knowledge, and are the natural choice in vendors’ minds, and the amount of premium stock they list and sell.

Another flaw of the online model is the fact that 50% of property does not get sold by the first agent, so 50% of online vendors are paying for nothing, as they have to pay a fee for no result, and then go and instruct a second agent or third agent, so only half the vendors are getting a fair deal, perhaps online agents should state their true sold to for sale rate.

(PB) maintains it ‘converts 83%’ of instructions to sales’, if so this bucks the national 50% trend, and is the golden breakthrough. But I think what they may be stating is that (PB) converts 50% of instructions to sales, and then of the 50% of their instructions they fail to sell, these (PB originating) instructions get sold by a second or third agent down the line (so 50% plus 33% = 83%.) I could find no hard evidence either way as to what is the true position, and without data being released to back this claim up one way or the other, this will remain so.

Without doubt for some, online agents are still great for the vendors because the massive subsidies these online agents are receiving mask the true cost of the marketing of the properties. But in the next 18-months shareholders, and private investors will be looking very closely at the profits being generated, and if they withhold their annual cash injections at least half of the players listed above will cease trading, and the remaining online agents will look to increase their basic upfront fees, which in each year of trading have been steadily increasing, rather than reducing.

Interestingly, if you look back to the breakdown of how many properties, each online agent had listed at a snapshot in time, for instance Emoov had 1,800 generating £1.6M of revenue. In contrast on the traditional estate agency basis, if an estate agency group had 1,800 properties they would sell 50% of them at £4,000 (plus VAT) = 900 sales at £4,000 (plus VAT) = £3.2M of revenue.

So, perhaps, somewhere between that online income stream of £1.6M and that traditional income stream of £3.2M lies the real future of estate agency – the Medium Charging Agent.

The Medium Charging Agent

The MCA (Medium Charging Agent) – will be the property professional with a highly skilled sales team, who services the whole of the market, selling property through all price ranges, not a niche price range of £240,000, and not just  relying on Rightmove and Zoopla to find a buyer, with a menu of services, and a small bricks and mortar office and a fee large enough to make a reasonable profit, which the vendor feels is fair. 

Because each property is unique and needs that personal connection, estate agents in the final analysis do not list property they list vendors and their aspirations. Pure online estate agents are not the solution, just as the internet is not the answer; it is a tool and symbol of change, and agents need to embrace this.

Where we are now is two polarised camps, the traditional agent charges a fee,  only to vendors who get sold, and makes profit; and the online agent charges half this fee to all of its clients, even if it does not sell them – and at this price point it always is doomed to makes a loss.

Can a traditional style estate agency convert itself overnight into an online agency?

This is a good question because Countrywide, the largest traditional estate agency by network size, which trades under a number of brand names up and down the UK, is doing just that, it had 1,000 branches but with rapid branch closures it has now reduced this number substantially. Historically, Countrywide’s core culture was gaining higher fees than their competitor agents, and doing volume sales, a great combination for profit; big fees and lots of them.

However, due to many factors, it found itself losing profit, and in the first six months of 2017, made 95% less profit than in the first 6-months of 2016. To combat this downward spiral, it quietly rolled out an upfront service akin to the online agents in 2016. Offering a low-fixed upfront fee, to list the property, and host it on Rightmove and Zoopla, and let the vendor then be in control of the marketing, with extra fees for doing viewings, an identical model to Purplebricks and many of the other online agents. It is now available at £995 including VAT, with other add-on products available.

Countrywide then added a fresh proposition, if the property did not sell, then they would market the property in the traditional way, and charge a traditional fee, deducting the upfront fee already charged. A great proposition you might think, remembering that the first agent always only sells 50% of what they get instructed on, so if they fail to sell it on the online model at a lower fixed fee they will sell over 30% of them at the traditional fee.

This all sounds great and indeed, and now many other independent traditional bricks and mortar estate agents now run this double sided sales proposition. They take your property to the market, for a low fixed fee and put you on line that will be £800 – £900 (plus VAT), upfront, and if it does not sell, they will get the sales team involved and sell you, at which point they charge you 1.1% + VAT or whatever fee is the prevailing fee in that area, minus the £800 or £900 plus VAT you paid.

The only problem is, do you remember my early example of setting up the estate agency and the monthly running costs, well at £18,000 a month break even, to make £120,000 profit a year (just from property sales fees) you need £28,000 of money in a month from property generated fees.

If you are Countrywide, or indeed a brand new Independent starting out, and you charge £800 plus VAT upfront, then you need to list 20 properties, every month where the vendor pays up front, and my guess is that some vendors will actually want to go with the second option from the go get and pay a bigger fee down the line when they have exchanged, so you may need to list 25 properties to get 20 vendors paying upfront.

At this level you are covering costs and working for nothing, 20 listings, at £900 each = £18,000 the office breakeven point. To get that £12,000 profit a month you need to list another 12 pay up front properties, so 32-listings a month for 12- months. In reality it is 11-months as half of December and half of January is dead time and few listings exist, so really you need to list 35 properties for 11-months.

The big problem is that there is at present a property drought, fewer instructions coming to the market nationally than at any other time, and the average amount of property that each estate agent is taking to the market a month is not 35, or 32, or 20, but under 12-properties, some agencies are doing much lower business than this. Even the self- employed LPE’s are on average only listing eight a month, and their territories are larger than a typical agent in a town with maybe ten to twenty agents.

So, back to Countrywide, or any other corporate or traditional independent agent, if you have super king-size office in a major town with a sales team of ten, and expensive offices, etc, your monthly breakeven point might be 50k or 60k. Now you will have other income streams, financial services, bringing in 40% extra revenue, maybe lettings, but at its core, if you are offering the £900 plus VAT, you need to cover £25,000 of office monthly running costs. Then if they look to make profit of £30,000 a month on top, from property selling fees, means they need to take 67-properties to the market a month, over 11-months.

My thoughts are, you are going to take on at best 30-new instructions a month, and that is if there are not lots of other decent independents snapping at their heels, so they are at best breaking even, maybe running at a slight loss, which year on year is not sustainable.

And if you are a new small independent agent and you follow the online fee model, and you get eight-properties a month on the market, six at £900 plus VAT and two on the traditional ‘we will pay a fee 14-weeks after you agree a sale on completion’, then their cash flow is £4,500 in and £18,000 out – not sustainable either.

Does it really cost a traditional agent £18,000 a month just to break-even, surely not?

Maybe it does not really cost £18,000 a month just to break even, maybe we can cut some corners, let me go through the numbers.

Office /Establishment costs: £2,000 per month (Light heat, property maintenance, property insurance, cleaning.)

Communications:  £1,500 per month (Telephone, postage, dx, stationery, photocopier, computers, non-capital office equipment, equipment maintenance.)   

Advertising:  £2,000 per month (Press spend and advertising cost on property, mail shots and promotional, boards, photographs, property details, printer consumables, other advertising costs, Rightmove advertising and add-on services, Zoopla advertising and add-on services, own website.) 

Travel and motor costs: £600 per month (Short term car hire, motor fuel, mileage allowance, motor insurance, motor repairs, travel expenses, other motor expenses.)               

General expenditure: £200 per month (Subscriptions, locks and keys, entertaining – business, petty cash.)

Bad debts: £200 per month.

Depreciation:  £750 per month (Fixtures and fittings, motor cars, improvements).

Sales Team Salary:  £10,400 per month (Manager/owner £45,000, Lister £30,000, Senior Negotiators £30,000, Negotiator £20,000 – including cars or car allowances.)

Admin & part time staff:  £1,200 per month.

Accountants & solicitors: £330/month.

So there it is a smidge over £18,000, that is your breakeven point, £216,000, a year, every penny over that is gross profit. If the estate agency is part of a chain, add another £1,500 a month for head office costs, so break even £234K, could even be £250k.

On-line estate agents the disrupters

So where does all this leave us? Well on the one hand you could say all agents sell half the stock they take on, so the obvious choice seems to be go with the pay up front online agents. The flaw here is that (PB) the daddy of onliners, has an average sale price of only £240,000, when it achieves a sale. So on-line agents with their 6% of the total market share are definitely not going to be any use for a massive segment of the property sellers in the country selling property at £240,000 plus.

What the online brigade have really done, is brought to the market a fresh option for vendors, onliners are the great housing market disrupters, offering low fees and actually selling property. No matter that shareholders and private investors are behind the curtain pumping millions into the scheme, which would collapse without these frequent injections of capital, because the general public’s perception is all – low cost agency.

Disrupting the psyche of the vendor

But, and I think this is key, the onliners and especially (PB) are definitely the new housing market disrupters, but more in the  sense that they have in less than three years disrupted the psyche of the vendors, and re-written the sacred principle upon which traditional agency is based, no sale no fee.

Five-years ago, if someone had predicted that an agency or core of small agents, could change the UK’s vendors from a position where it was no sale, no fee, to yes please let me pay you upfront now, they would have been laughed at.

But (PB) and others with massive advertising campaigns focusing on not paying commission to estate agents on completion, instead paying a transparent fee upfront, have transformed or as I put before – disrupted the psyche of the vendor – and reprogrammed them to accept a ‘pay now rather than pay later’ business model. This is absolute brilliance, positive cash flow from each instruction and no pressure to sell, as you already have your fee.

The advent of the MCA (Medium Charging Agent)

Just as the online agents have re-educated vendors almost overnight to embrace this model – could the traditional agents not hit back and duplicate this model – Get vendors to pay upfront?

So, the traditional estate agent goes to the vendor and says here is our menu of services that we are going to use, all things the onliners have plus a real office and a dedicated sales team, who form a 60% part of our overheads but we think they are essential in getting you sold.

But, instead of charging the vendor their usual higher fee of say 1.1% on a £360,000 property plus VAT, which = £3,960 plus VAT on completion. The traditional agent says they will actually charge a fixed fee upfront fee of only £1,980 + VAT, half their usual fee, how does that sound?

My thoughts are the vendor might bite the agents arm off, as the vendor is happy as on the face of it they get a far cheaper fee, and they get a proper bricks and mortar agent and that large sales team with all their local knowledge, and the fact they have hundreds of registered buyers who they ring, e-mail and text to get them into the property.

For this equitable solution to work, all it takes is for the non-online agents to disrupt that collective vendor psyche just a little bit more. Maybe a sustained, television and multi-media advertising campaign – re-educating the vendor public to accept the fairness of a system, where paying upfront for all, means lower estate agency fees for all.

So is there a flaw to this model? Would the traditional agent not lose out charging less? Remember, the cost laden traditional agents are cutting their fees, will it mean they will not make a profit?

Let us see, if we use the original model that a new traditional agent’s, break-even is at 18k a month, and in an area where their average sale price is £360,000 and their average fee is 1.1% plus VAT, that is a fee of £3,960 plus VAT. So they need to exchange on four and a half properties a month to break-even, and to do this means they need to list nine, as they only sell half.

So, on the ‘old’ no sale, no fee model, they list nine vendor’s properties at a fee of 1.1% + VAT, or £3,960 plus VAT (on a £360,000 sale price), so that is 9 x £3,960 = potentially £35,640 of fee. They fail to sell every second property they list, national average, so they exchange and receive fees on 4.5 sales, or £17,820.

On the new MCA charging system, they list nine vendor’s properties at a fixed upfront fee of 0.55% plus VAT against a sale price of £360,000, so £1,980 + VAT per property. So, 9 x £1,980 = £17,820, an identical revenue flow, and it is instant revenue, rather than waiting 16-18 weeks the average time that it takes for a property to complete.

Obviously to make a profit, of £120,000 annually, they would need to generate another £10,000 from house property fees, a month, which is listing another five properties at 0.55% upfront, at £360,000 property price per month. Could this more equitable, lower based cost to the vendor – but with an upfront payment twist be the answer?

It hinges on traditional agents charging half their normal fee, which in some cases will be higher or lower than the £1,950 plus VAT quoted, depending on established fee levels in the area. So, if the property value was 1.25M, the fee at 1.1% plus VAT may be £13,750 plus VAT, agents might charge 1.5% plus VAT, £18,750 plus VAT. But, if the proposition was the fee is going to be £18,750, plus VAT, or £9,375 plus VAT I am sure agents would get takers.

Also, it would mean vendors would be more realistic about asking prices as inflated prices mean higher fees, basing fees against initial asking prices. Lastly, if the vendor has put his or her hand in her pocket upfront – then they are not going to switch agents – which mean that as the vendor is chained to the agent, and they are in it for the long haul together, then it is likely that this business partnership may be stronger and more motivational for both sides’.   Original Article ends – Andrew Stanton.

Of the onliners or hybrids referenced in the above, many have ceased to trade having run out of cash or were turned off as they just burnt investors cash, or the business models pivoted.

Purplebricks is still there punching away, but if it was to topple would it cause the few remaining players to call it a day, in the coming months we will see. What is certain is 2023 is shaping up to be a real bruiser for the residential agency vertical.

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Proptech and Property News in association with Estate Agent Networking.