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Techpotato Def: A tech play that is so hot it's passed from investor to ever increasingly bigger investor all making profits along the way. Until it’s finally dumped on to the stock market at IPO where it subsequently burns anyone still holding it.
What was the straw that broke the camels back? Was it the initial up-front fees, instead of pay on results. Was it ‘Local Experts’ who turned out had so many instructions they couldn’t service them properly. Maybe it was the mega cash that needed to be spent to consistently maintain market share? Perhaps it was the investors desire for rapid profits, at any cost. Whatever, it looks like the wheels are close to falling off another Techpotato.
But what was, or should we say is, so offensive about online agents to the majority of estate agents? Don’t get us wrong, they have their place. Sometimes a seller simply wants to sell their property themselves, to pay the minimum possible fee. Usually when their property is of a lower value.
By devaluing the fee you are essentially implying that the value delivered by an agent is not up to the fee they charge. They are sort of ripping you off.
What seems obvious is that by devaluing the fee (which is already amongst the lowest in the world) you are essentially implying that the value delivered by an agent is not up to the fee they charge. They are sort of ripping you off. Perhaps that’s why estate agents have such a bad reputation in the UK, because people genuinely believe that to be the case. No doubt I’m sure it’s something investors and those with little industry knowledge regularly tell each other.
Though, you can’t fault the advertising or investment pitch of an online agency! Everyone hates estate agents, they are a rip off. We have produced something that cuts them out of the equation (to some degree), everyone will agree with us and we will scale to an enormous size, at astronomic speeds. Isn’t that an attractive investment, don’t you want to use us?! Well, yes absolutely if you believe that that is indeed true.
The problem is, it isn’t.
It seems investors don’t want to hear sense, they want macro returns in microscopic time.
Years ago when we were also pitching for investment we came across a well known respected agency who had staked a considerable amount of money behind another online agency. That also went bust. It seems investors don’t want to hear sense, they want macro returns in microscopic time. It reminds me of crypto… I knew I’d seen it before. One of these online agencies' price charts look remarkably similar to that of many crypto tokens that exploded and then crashed. It's the chart reflection for human greed, and like many crypto tokens there’s just no inherent ‘value’ backing it up. The value is being able to sell it on for more than you bought it. But when the pace runs out it begins to collapse - fast.
When we talk about ‘value’ what are we talking about exactly? Well it’s the value the service you are paying for delivers. It’s funny how value might not fluctuate massively between high priced services (like a Michelin starred restaurant) and low priced services (like McDonalds). It’s a ratio of the price you pay versus what you get in return. Great companies provide higher value, poor companies provide low value. We’re always looking to get the most bang for our buck.
One of these online agencies' price charts look remarkably similar to that of many crypto tokens that exploded and then crashed.
Strange too that the higher the priced property in the UK, the higher the fee a seller is willing to pay. The average member of the public would think the diametric opposite. The reason is that a wealthy seller knows the value of great service. The cost of using an inexperienced agent to sell your property gets proportionally greater as the value of your property increases. The result it that even paying what is considered to be a high fee in the UK at 2% of the sales price, becomes preferable to an inexperienced agent at 1% and clearly a fixed extremely low fee is most unattractive. In theory the fee is working exponentially more for the seller and the value increases. It’s therefore not surprising how at Moveli, where we offer experienced agents and a personal service, the fees our brokers are charging are actually increasing.
The fact remains though, that many agents operating in the mass UK market where the average sale price is around £290k and the average fee is 1.25% will only make a slither of the £3.6k average sales fee.
It would be far better if agency start-ups stopped looking at the reduction of fees in order to deliver more value and instead focussed on just delivering, more value.
In the UK online agencies have their place. They deliver some value to those looking to sell for as little as possible. The choice is between paying on average around £3.5k to an agent on the high street. Or paying around a third as much (or less) to do it yourself. Will choosing an agent earn you more than the difference in fees despite the service they can afford to offer, I’d like to think so, but the public may not. It seems that the UK structure of low commissions and fees is particularly broken and intense the lower down the market you go.
It seems that the initial explosion of online, do it yourself agencies happened because of three forces coming together at the same time. One was the low value associated with high street agency services in the mass market. Another was the change in property listings from estate agents windows to online portals. And lastly, it was the investors desire, let’s not forget, who were being told things they wanted to hear, to make rapid returns.
The blame however, rests on the structure of agency. It’s the structure of agency in the UK that leads to an agent getting paid at most around 10% of the fee the seller pays. It’s this setup that suffocates and short circuits the value. Especially as you slide down the price points, where fee rates reduce at the same time as the fees themselves, making it exponentially harder to deliver value.
Either [the seller] pays a higher commission rate, or the agency takes much less of the commission and hands it to the broker instead.
If sellers want more value from their agent, their agent will need to earn more personally from the deal. Either they pay a higher commission rate, or the agency takes much less of the commission and hands it to the broker instead. Clearly the latter is the better option. Simply reducing the fees to almost nothing and asking the seller to sell the house themselves, does not provide the value I believe a seller is looking for, as many online agency customers no doubt found out.
The points above add up to a lot of reasons why the online agency isn’t something I think we will see winning majority market share. But there is one other reason that some have struggled to survive. Marketing.
The sheer volume of deals that need to be done by an online agency to make any money at all is enormous.
The sheer volume of deals that need to be done by an online agency to make any money at all is enormous. To get the leads to satisfy this you have to spend millions of pounds on marketing, everywhere. I could be wrong but I believe that this was overlooked by investors in online agencies. I presume they were told that once enough had been spent then a tipping point would occur and no longer would the spending be required. The problem is that only occurs if you are delivering a service of such value that once someone experiences it, they personally recommend their friends. Without that, you just have to keep on spending to keep on attracting new customers. It’s not possible to keep up with that rate of burn.
Personally I do think there is a business to be made in the do it yourself online agency sector, where fees are extremely low, though I’m not sure what kind of scale it can achieve outside the bottom end of the market. Particularly if the market continues to move towards a broker led model, where the broker earns more of the fee the seller pays, and the seller gets such a great service they recommend their friends.
It would be far better if agency start-ups stopped looking at the reduction of fees in order to deliver more value and instead focussed on just delivering, more value. Imagine if all those millions spent telling the public that agents weren’t needed were instead spent on genuine industry improvements, like licensing, better buyer services or (crazy one) perhaps paying the agent more personally to deliver the service?
Just a thought.
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