Hello again, this week I would like to talk about the pros and cons of the current estate agent models. 

These being as you have probably already guessed paying a flat rate or paying commission. 

First let's talk about what the difference is and where you can find these. 

Commission, this is where you pay a percentage of the final sale price to the agent. The percentage you pay will be up to you to negotiate before you agree to use an agent, it is usually 1%-2% but it can be as high as 5%. This means that if you are selling your house for £100,000 you will need to pay the agent £1,000 - £2,000 but could be as high as £5,000. 

Flat Rate, this is where you pay a fixed price to sell your house, there are companies that specialise in this they are often online only and offer local agents who will manage the viewings and listings. You can sometimes negotiate with a high street estate agent to get a flat rate but usually they will only offer this to developers and landlords that they think will be offering them repeat business. 

So then what are the pros and cons of using these methods?:

Flat Rate:

Pros:

1). It’s a fixed cost so you know exactly how much you will be paying upfront. 

2). Usually cheaper than paying a percentage of the final sale price. 

Cons:

1). Because it is cheaper the business model the agent is working on is bulk. So why is this a problem? 

Well let’s look at an example:

I have a £500,000 house to sell, I decide I'm going to pay a flat rate of £1,200 using an online agency, amazing I've saved £8,800 in commission, assuming I didn't use an agent that would have charged me 2%. However let's look at this from the online agents point of view they have lost £8,800 by allowing me to sell for a fixed rate, that means they now need to sell another 7.333333... houses to make the same money. This means that for every £500,000 house a commission based agent sells, the fixed rate agent needs to sell 8 houses to make £9,600. Let's say that a normal agent sells 12 houses a year at £500,000 so they can really concentrate on selling and getting the best price for the seller. They would make £120,000 in commission, in order to make the same amount the online agent needs to split their focus and sell 100 houses a year to make the same money which is 8.3333… houses a month. 

2). The motivation of the agent is to sell the house quickly meaning you could get a lower price.  

So what does this all mean for you? 

Well the fixed rate agent business model is as I have already mentioned bulk, they need to sell a lot more houses to make the same money as a commission based agent, this means they need a high turnover of property. They might say they can sell your house faster than a normal agent, but this is because they have to, that means that you are likely to get a lower price for your house as the agent will be keen to get your house sold quickly. Their motivation is the opposite to the commission based agent they already either already have or know how much they will make so their motivation is to sell the house as quickly as they can and move on to the next sale. They are chasing new clients not trying to get you the best price. This means you could lose money on the sale of your house. 

This is where it gets a little complicated and I don't want to get too deep into business models and costings, but in fairness to the flat rate online agents there are a couple of things I haven't included in the maths that I will mention so I’m being as fair as I can. 

1). They don't have the same overheads as the highstreet agents, e.g. offices, this means that they probably don't actually need to sell the 8.333 extra houses to make the same money as their running costs are lower.  

2). If you get a lower price for your house you may still have made more money, this may sound counter intuitive so let me explain. Say you are selling a £500,000 house a commission based agent charges you 2% so the amount you owe them is £10,000 which means you have effectively sold your house for £490,00. Now let's say that you pay a flat rate agent £1,200 but they only sell the house for £495,00 once you take the flare rate off you have effectively sold the house for £493,800 which means you have made an extra £3,800. 

Ok so now let's move onto the pros and cons of paying commission:

Pros: 

1). You will get a traditional agent that you can select with a presence on the highstreet, this means they may already have a buyer for your house. 

2). They are working for a % of the final sale price so they will be looking to get the best price for your house. Right?

3). They don't get paid till completion so there is motivation to sell quickly.

4). The don't have to sell as many houses to make the same as a fixed agent so can concentrate on selling fewer houses. 

Cons:

1). You will probably pay more than using a fixed rate agent, the usual price is 1%-2% but I've seen it as high as 5%. Imagine paying £25,000 to sell your £500,000 house. 

2). This one relates back to pro 2 above, you would think that an agent is interested in getting the highest price for your house as they will earn more money, well this can be true but it can also not be true.

I've mentioned this in previous blog posts but there are a few different kinds of motivation when it comes to commission. 

Let me explain there are agents that will look to get you the best price, but being motivated and measured on sales and how much you earn is a complex game to play. This boils down to the type of agent you end up using and the way they like to do business. Have you ever heard or experienced it when you get 3 prices from 3 agents on the same house and you get 3 different prices? And wondered what's happening?

Well let's look at the theory,  

The lowest price is what an agent thinks they can sell it for quickly.

The middle price is what the house is actually worth.

The highest price is what the agent tells you they can sell it for to get you to sign the contract and then will call and say you need to lower the price because the market isn't doing what we expected.

These differences come down to the business model of the agency or the metrics they use to measure performance. 

The first agent is interested in a quick sale. This could be motivated by the bulk model of selling i.e. it is better to sell a lot of houses quickly and make small commissions than to sell one house for a lot and make one big commission. Example if I sell 10 houses in a month for £100,000 each I can make £20,000 but if I sell 1 £500,000 a month I will only make £10,000. 

The third agent is interested in signing as many people up as they can in order to lock them into a contract by telling you you will get more for your house than it's actually worth. They will then tell you to lower the price in order to sell it. 

The second agent is giving you a fair price for your house and wants to work with you to achieve the best deal for everyone. 

So who is best?

Well I can't answer that, all I can do is give you the information to make your own decision. You need to decide what's best for you and do the numbers to work it out. 

If it were me, I would be asking if there was another way, perhaps somewhere I could pay a fixed rate but do the work myself, so I maintained complete control over the process working for myself to get the price I need. Like autotrader but for houses 😉    

My last point on all this is that, I'm not saying that all agents are out to get you and are only interested in money, but don't be fooled into thinking that they are working for you all the time, at the end of the day they work for the agency, who are a business that need to make money and want to make the maximum profit. How they go about this is unique to them and they will all have different morals and standards of conducting business. The metrics that are used in all sales jobs are roughly the same, number of sales and commision/how much you earn. Different agents will have different strategies to meet their targets but it always comes down to the money. They all need to meet these targets to make a living. How they do this comes down to them as an individual and how they have been trained.They aren't all looking to rip you off and there are some very good agents out there you just need to know where to look. 

I hope you found this post helpful. Please don't forget to like, share and comment, until next week.