One of the greatest experiments in government intervention is now taking place in the UK following the introduction of the tenant fees ban on 1st June. 15,000 estate agency branches and 50,000 employees are now tackling the issue of how to replace the income they will lose this year, which, if the Scottish experience is anything to go by, may average £9,000 a year per office, or 10-15% of revenue.
How to replace this income has been vexing many business owners over the past year or so as the fees ban has loomed.
The solution depends on how they operate. As Tim Hassell, MD of leading London lettings-only agency Draker, says, “The agents that have discounted landlord fees and charged more to tenants are by far the most vulnerable.”
David Cox, CEO, ARLA Propertymark, says businesses with a balanced fees structure are most likely to survive the fees ban, agents are going to have to be bolder about how they market themselves and what they can charge their clients for. “Agents are going to have to put up their fees – there’s no way around it – to reflect the service they offer landlords but that will also mean offering different levels of product,” he says.
Agents are going to have to put up their fees – there’s no way around it – to reflect the service they offer landlords but that will also mean offering different levels of product. David Cox, ARLA Propertymark.
“That means being more transparent about what they are charging for. I think a lot of landlords don’t realise the value for money they get from a ‘fully managed’ service. This is particularly true for legal, compliance issues and handling deposits, all of which take huge amounts of work but landlords take it for granted.”
“Whichever model an agent operates I feel the tenant fee ban has given everyone a great opportunity to look at their model and adjust costs accordingly,” says Simon Tillyer of tenant referencing company Vouch. “Agents who have built a strong managed portfolio and charge a fair fee for the work they do will not feel such a big impact, but the agents on the reverse of this who have offered low fees to win market share will need to maximise secondary income streams to survive.”
A good example of this is the estate agency, KFH. Three years ago it published a list of its additional or optional landlord charges that ran to 14 items, but its most recent version of that document reveals it has upped this to 24 items.
Interestingly, its pre-ban fees structure included £210 charged as the landlord’s share of drawing up the contract costs. Now, it is £300 for the full cost of the service. But several of its services have dropped in price, rather than increased; its abortive letting fee when a landlord pulls out of a contract after an offer is submitted by a prospective tenant – has dropped from £600 to £180.
Some agents like KFH are restructuring their charges and one company helping them do that is ARPM, “We’ve been working closely with our lettings clients for a while to help them mitigate the impact of the fees ban,” says its MD Simon Duce. “Not only have we taken on the burden of amending documentation and processes for them as part of our standard service, we’ve also helped them to restructure some of their service packages for tenants and landlords to give them the opportunity to earn additional income.”
We’ve been working closely with our clients to help them mitigate the impact of the fees ban, taking on the burden of amending documentation and processes for them. Simon Duce, ARPM.
David Cox says agents will turn to suppliers for better deals, amalgamate services and use proptech to make their businesses more efficient. “I think a fair summary of the future for letting agents is that they will have to work both smarter and harder,” he says. “One silver lining for the industry is that it’s going to accelerate the rate at which it professionalises as the ‘get rich quick’ agencies who charge landlords nothing and tenants high fees are cleared out. Those charging reasonable fees will survive but it will be painful.”
Tim Hassell is more upbeat about the future. “The tenant fee ban will stop these agents charging the one-off tenant fee, but the bulk of their revenue will remain untouched. With the level of tenancy variation and a high volume of transactions, the tenant fees ban will not have any great immediate impact on their business model. Instead I believe that the fee change will be absorbed slowly into each agency and they will just work a little harder to let more property.”
Agents that discounted landlord fees and charged tenants are most vulnerable. The changes will slowly be absorbed and agents will just work a little harder to let more property. Tim Hassell MD, Draker.
Paul Shamplina of Landlord Action, says; “Landlords need decent managing agents more than ever with regard to ever changing law, regulation and compliance to protect the landlord’s tenancy and investment,” he says. “Landlords being charged larger management fees will result in some landlords increasing rents.”
Hassell says the most viable offering for a letting agent’s long-term success is to charge their landlords a proper fee – without a discount – and then to focus much more heavily on providing an increased level of service to both tenant and landlord, to ensure that their fee is earned at ‘every step of the way’.
But what both Cox and Hassell don’t talk about is referral fees. They are controversial – the Government says it wants to force agents to tell landlords and tenants alike when they have earned a fee for recommending a service – but could these fees replace at least some of the £300 per tenancy that letting agents used to earn?
Mortgage referrals: Approximately £500 per referral
Mortgages may be the best option for agents to earn commission, if they help landlords source financing for their next investment purchase. Agents can earn fees of £500+ per mortgage. It’s why so many agency groups have in-house mortgage brokers. Countrywide revealed that for every £1 of sales revenue it receives, another 40p is earned from mortgage and conveyancing referral fees.
Deposit alternatives and income streams
The fast-growing deposit alternative sector is one of the key areas from which letting agents can source new income streams by recommending these services to tenants. “In terms of recouping fees from outside suppliers, quite a few agents are signing up to deposit guarantee services which offer the agent a fee should a tenant sign up to it for their tenancy,” says Charlotte Mitchell-Innes, Head of Lettings at Aylesford International.
“As Aylesford is in prime central London, many tenancies fall outside of the ban so we are still able to charge administration fees to the tenants, so only a proportion of our tenancies are affected.”
Not all suppliers are keen to position themselves as being alternative income streams. Flatfair is one of the leading platforms within the deposit alternatives sector. Daniel Jeczmien, Flatfair’s founder and COO says, “I would refrain from having our name attached to anything which focuses solely on creating a new stream of revenue. Our approach focuses on the core values that Flatfair brings to partners’ lettings businesses: competitive offerings for tenants and landlord, reduction in admin costs versus deposits and the value Flatfair has in strengthening tenant and landlord loyalty.”
Vouch offers agents referencing that is up to 80 per cent discounted alongside a suite of secondary income streams including utility notification with income generation, rent guarantee, landlords and tenants general insurance, Sky and a Zero Deposit option. “As Vouch already has all the required data, we can automate all of these options for an agent; we have teamed up with the best provider in each category to supply a simple solution offering industry-leading commissions,” says Simon Tillyer.
Conveyancing fees: £100-£350 per successful referral
Conveyancing fees can be earned by letting agents when landlords sell their properties and ask for a conveyancer recommendation. These are often the next best revenue generator for agents after mortgage referrals, often running into several hundred pounds. Purplebricks recently let slip to a customer that it earned £384 in commission from one particularly legal firm.
Agents can earn conveyancing fees when a landlord sells a property and asks them for a recommendation. Purplebricks let slip to a customer that it earned £384 in commission from one particular legal firm.
Case Study: Zero Deposit
“Although commission is a consideration for agents who have signed up with Zero Deposit, many have told us that their decision to offer the product is driven much more important factors,” says Jon Notley.
“Advertising properties with Zero Deposit available can lead to more response from the portals, more demand from tenants, and less fall-throughs as tenants need to find less up front money when moving.
“Some agents have told us that they have not lost a single multi-agent listing since offering Zero Deposit and are using our product to differentiate themselves in their local market. Commission is a bonus, but an extra deal is worth a lot more to an agent.”
Tenant perks providers
Pays: Up to £50 per service sign-up
A new kind of revenue stream is available to letting agents via ‘tenant perk’ platforms that offer agents better engagement with their tenants, and tenants discounted coffee, cinema tickets, gym memberships and even shopping. Agents make money when tenants upgrade to the platform’s premium service.
Tenant/landlord insurance and utilities: £50+ per referral
Contents insurance for tenants and landlord insurance products are a huge opportunity for letting agents to earn extra income. Insurers can pay between 10 and 25 per cent, with the premium value depending on the amount being insured. Contents insurance begins at £70 and landlord insurance begins at £80 but can reach £250. One insurer recently revealed that its best-performing letting agents earned £7,500 a year on average in additional revenue from recommending insurance products.
Case Study: Vaboo
“Our Customer Engagement & Perks platform enables our clients to add value to the renting experience and gives them a competitive edge by offering a real point of difference and added value to their service,” says Jonathan Stein of Vaboo.
“It shows they think differently and know the importance of having good relationships with tenants and want to provide the best service possible. This all helps them stand out from the crowd and drive business growth through new instructions.
“When users upgrade to our Premium service agents receive roughly £48 for each upgrade per year. In addition, we have a growing number of suppliers of other products and services who pay commissions on each transaction.”
Case Study: Goodlord
One of the key planks of Goodlord’s offering is its ability to pay letting agents referral fees for recommending a swathe of different insurance products.
“We can help agents streamline costs and introduce new revenue streams through a series of different products,” says Tom Mundy, its COO & Co-Founder.
“Firstly, our digital platform means agents can minimise errors, reduce admin time, and automate huge swathes of the lettings process. This frees lettings teams up and allows them to focus on commercial growth.
“Goodlord also provides additional products and services, which are integrated into the digital pre-tenancy process, at the optimal time for market-leading conversion rates.
“Agents can open up new revenue streams with our rent protection insurance, tenants’ contents and liability insurance, deposit replacement insurance, broadband and media, and our utility switching and void management service.”
Case Study: Ittria
“Ittria has provided free services and revenue opportunities to hundreds of letting agents for 15 years,” says Alan Campbell, Business Development Manager a.
“With the introduction of the fees ban these services are even more compelling as agents look to replace lost revenue and save costs.”
As well as free services, including tenant referencing, Ittria’s model is to enable agents to offer tenants and landlords products that earn referral fees, including utility management, broadband services and both tenant and landlord insurance. They are also launching rent guarantee insurance for landlords that will pay commissions.
“Agents can generate up to £172 per change of tenancy in cost savings (i.e. free referencing) and revenue if they take all of our services and tenants take up our insurance product, however the average is less as not every agent takes up all of our services,” says Alan.
“The key in generating revenue is not commission per energy, broadband or insurance but the percentage of change of tenancies that lead to a conversion.
“For example, outbound calling a tenant to switch supplier will result in about a 10 per cent conversion ratio and that’s if they’ve actually agreed for their data to be used.
“In our case, conversion ratios are 95 per cent as we switch the property during the void period at which point the agent has the right to switch the property on behalf of the landlord. Our largest agent Partner makes in excess of £100k per annum in commissions.”