Commisery vs. Home sale regret – which estate agency model is best? PART TWO

This article follows last weeks, and is the second of two articles that considers the pros and cons of online and traditional estate agency business models.  This week, I will consider the true cost of each model, the relative importance of maximising the price achieved vs. reducing the costs involved; and, how agents secure a price premium.

Is the online offer as cost competitive as it appears?

On first look, the online offer looks unbelievably cheap, and hence the Purplebrick’s marketing focus on ‘comisery’.  But, is it really that much more efficient?

A good-performing traditional estate agent expects to sell around 65% of the properties it lists, and clients only pay a fee if they sell. According to a recent survey, online agents average up to 50%.  That means that half of online agent clients will pay a fee but will not achieve a sale.  Of those that don’t sell, 17% go on to appoint a traditional agent to sell their property.

Per 100 properties listed, an online agent in Oxford will receive fees on every property.  At the current average of £995 that’s £99,500 in fees.  If only 50 of the properties sell, that’s £2,000 per property sold.  For the traditional Oxford agent mentioned above with average fees of 1% of sale price, 65 properties will sell at an average fee of £4,085 per property sold. 

Based on this, the online model under-cuts the traditional model by 50% per property sold in the current market.  But that is achievable only because clients whose houses fail to sell, effectively subsidise those whose houses sell.  Great news for sellers who sell, but very bad news for those who don’t, many of whom then appoint a traditional agent anyway.

What’s more important sale price or agent fee?

Because an average Oxford property costs £408,500, each 1% extra achieved on a home’s sale price delivers around £4,000 of additional return for the seller.  That means an accepted offer at 95% of the asking price for an average Oxford property is £388,000 or £20,400 below asking price.  It seems to me entirely fair to assume that an agent whose fee is proportional to the price achieved will have more incentive to try to maximise the sale price, rather than encouraging their client to settle for a ‘good’ offer because their fee has already been paid.

An agent that negotiates hard on behalf of their client, achieving offers from multiple parties will achieve a 2 to 4% premium.  Let’s assume a 3% premium is secured on the above property resulting in a sale price of £400,000, that’s a price premium of £12,000.  Where the traditional agent fee is 1% (a typical level for Oxford) their fee will be £4,000, resulting in a net gain for the client of over £7,000 (having allowed for the online agent fee of £995).  So, despite paying a fee four times the value of the online agents, the client is over £7,000 in profit.

It is this fact which is causing questions to be asked about the online agency model.  Can a model where the fee is paid up-front, really encourage that agent to strive to achieve the 3% premium described above.

Selling an Oxford home is all about maximising the price you achieve

Homes in Oxford are expensive, securing the best possible price is THE most important factor.  When 1% of an average home equates to over £4,000, working with an agent you trust, and who will work with you in the way you want is the most important factor. 

The true premium paid for traditional estate agency is almost impossible to determine with the data that is currently available.  Increasingly we will see hybrid agency models emerging where seller will be able to personalise the approach their agent takes to reflect their own requirements.  It seems to me that every seller should focus on maximising the sale price they achieve and ensuring that a buying chain is nurtured across the line so sales complete.  That can only be done through dedicated attention to detail, by experienced agents.