Modern estate agency is a tough gig even in a good market. Selling fees have been under pressure for yonks (yes I know, no thanks to people like me pushing them down as an onliner a while back) and UK commissions remain amongst the lowest in the world.
The saving grace has been rising house prices whereby a constant percentage fee results in the cash equivalent now being 20% higher than two years ago given the capital appreciation of the average home.
Notwithstanding the ebb and flow of the market, agencies have understandably also looked to additional revenue sources to supplement and improve profits. Led by the corporates, agency branches and their employees have for a long time been whipped by their bosses on ‘upsell’ referrals. These opportunities have proven to be highly lucrative and have contributed massive chunks of cash to the bottom line of UK property firms.
So important has this extra revenue been to some companies that they have faced criticism in the press and by regulators for going too far in enforcing customer referral appointments – mandating that buyers ‘must’ see the agent’s internal mortgage broker before an offer is put forward or ‘must’ use their conveyancer partner in order to bag free finance on their upfront fee, for instance.
These tactics are all highly irregular and contribute to pushing the industry’s reputational snouts further into the swine. Yet they continue to prevail and several news articles attest as such including those highlighted by consumer publications such as Which?
Many agents won’t think this is a big deal, especially those that are benefiting from a stream of referral income. They’ve also breathed a sigh of relief this week as Eddie Hughes MP, a Housing Minister, seemed to suggest that estate agencies were off the hook where the previous threat of banning referral fees is concerned. I suppose what with inflation raging comparable to a corrupt South American junta, Boris’s lockdown liquor exploits to cover up and a new Coronachimp virus to contend with, Government has other distractions to occupy it now.
But with all that said, the principle itself of lawyers’ referral fees is bad in particular. Not just because of their tendency to encourage rule-breaking by agents or due to the resulting bad PR that some agents have encountered accordingly. But because they hide poor behaviour and sloppy performance on the part of the conveyancers that pay them.
I’ll elaborate. I recently witnessed a telephone call in which an estate agency brand was being sold a conveyancing service and was being persuaded to change their current provider. The agent’s resistance to change was purely focussed upon the referral fee per case that they were being paid by that current provider and that the commission being received per transaction was all that mattered to them.
At no point on the call did the agent enquire about service levels. Nor did they ask how long the ‘new’ conveyancing offering generally took to get from offer to completion versus the national average. Nor what their average fall through rate was nor what their operational USPs were. No, their sole objective was to squeeze more referral cash from each conveyancing deal, regardless.
This is mind-numbingly dumb. To be obsessed with a superficial commission regardless of performance is stupid and also irresponsible – actually, irresponsible to the agent’s P&L itself and as I will set out shortly but also to the consequential service that their buyer and seller customers ultimately receive. Yet I suspect that this attitude is prevalent throughout estate agency.
There is a rather more intelligent way of looking at mortgage and conveyancing referral business and especially where the latter is concerned and lawyers’ general inability to do two things at once and which has resulted in transaction times extending to match the speed at which continents shift.
So imagine for a second, difficult as it is, that there was a conveyancing practice that was efficient and quick. Let’s say when they were acting in transactions, those sales exchanged not six months from the offer being made but in a rather less lethargic four months.
Let’s also concede for the sake of argument that the shorter the transaction time, the less likely the deal is to fall through – simply because it has less chance to.
Actually, data I saw recently via a sales progression platform suggested that their average time from offer to exchange is indeed four months and that their fall-through rate is 15%. Whilst the UK average equivalents are six months and 30.5% respectively (Source: Twenty Ci).
Now, the maths…
- You own a five-branch estate agency business selling five properties STC per month per branch.
- Your average fee is £3575 (1.25% of the national average house price)
- Your fall through rate is average (30.5%)
- Meaning that you lose £327,112 in fall-throughs of the £1,072,500 written.
- If you halve your fall through rate because you change to a conveyancer that gives a toss, you save £163,556 in lost deals each year. Or £545 a deal.
So you see, selecting a conveyancing partner based on actual performance makes you more money than blindly insisting on a referral fee regardless of efficiency. Quite a lot more actually.
But of course, you have to know your unit economics in the first place and the ‘new’ conveyancer needs to be able to prove theirs too and many don’t, moreover the bad ones.
This is the argument for dumping referral fees. In fact, lets’ hope Government does their usual U-turn and bans them after all. It would do the industry and its customers a huge service.
Russell Quirk is co-founder of ProperPR.