Home » News » Agencies & People » Why do so few online agents make any profit?

Why do so few online agents make any profit?

A traditional cold-start agency can attain profit within two years, so why has only a handful of online agencies done it many years after starting up?

Andrew Stanton

online estate agencies

It is now ten years since the online estate agencies began in earnest but only Purplebricks has posted a profit in the UK, with most of its competitors still working hard to reach break-even and investor cash is burned.

But if only the tens of millions of pounds invested in online estate agencies such as Yopa, easyProperty, Hatched, HouseSimple, eMoov and Tepilo had instead been invested in a more traditional model, their shareholders might now be seeing a return.

Let us suppose you want to start a brand new traditional estate agency, how much profit will it make and when and how much does it cost to set up and run?

Start-up costs

It costs £30k to acquire premises and kit the office out and have all the IT hardware, systems, and office furniture in place.

Then it costs £18K a month to cover the overheads including a team of four-sales people and their salaries, cars, website costs, and all other costs to run the office and sell properties.

A traditional agency trading 50-miles from the capital will then market and sell property in all price ranges, mostly from £200,000 to £600,000, and as the brand matures they may specialise in both the mid-range and the top end range £800,000 to £1.5m.

On average they sell property at an average price of £360,000 and they charge 1.1% plus VAT, or around £4,000 plus VAT, £4,800 in total on a no-sale, no fee basis.

In the first 12 months of trading, if they sell a property on day one, the cheque for the completed sale arrives five-months later, and as they spend the first month getting property stock on the market, it is in their second month real sales begin.

So, after six-months of trading they have spent £30k on setting the office up and 108k on running costs, that’s 138k, and probably they have received only £5k in on commission from completed sales.

Over the next six-months their outgoings are another £108k, and the commission from completed sales dribbles in, plus VAT, at an increasing rate rising to £20k in month 12.

“Profit; what profit? there is no profit, they are now minus 160k for the first year.

First profits

Over the next 12 months – Year Two – office costs are £19.5k a month and income from completed sales is £26k a month. So £234k spent, and £312k cash flow in. Profit; 78k for the second year.

During the next 12 months – Year Three – office costs are £20k a month and income from completed sales is £28k a month. So £240k spent out, and £336k cash flow in. Profit ; 96k for the third year.

Only then is true break-even achieved; all the start-up capital, that £160,000 pumped in and ‘lost’ in year one, has been repaid and from here on in they have a profitable business standing on its own two feet, with no need for further injections of capital to keep it trading.

Online advantage?

But what about the onlne/hybrid operators? Whatever happens, on the face of it online agents must be cheaper to run than traditional agents, given they have no premises, rents, rates, utility bills, sales staff – yes, they have LPEs but no large sales teams; instead buyers are introduced by Rightmove and Zoopla.

So, isn’t it just a matter of time before these low-overhead online agencies clean up?

No; the online estate agency sector is only 6% or 7% of the total market so no-one knows about them and they are spending millions on advertising their brands rather than spending millions on the properties they are listing; that’s millions pumped into television, online, radio and other advertising just to buy awareness.

Unlike traditional agents whose main budget is used to promote the property stock they represent and sell property the new online estate agencies are throwing vast sums into media and brand advertising and who knows what their television commercials cost each year. Meanwhile, that investment would fund a whole division of cold-start traditional offices, which by now would be making a profit.

Andrew Stanton (left) is a former estate agent who has worked for both Countrywide and Sequence businesses. He now works as an industry consultant, analyst and journalist helping agents improve their businesses from both a traditional and proptech perspective. Visit his website.

3 comments

  1. Chris I agree in some ways – the online model focused on the wrong thing, cut out your branch costs, and most staffing costs, no manager, sales negs, etc – just have a lister, do not have database of buyers, passively farm portal leads, do minimal post sstc work, take a fee upfront sale or no sale.

    What they should have done is say – right what does the customer doing property want/how will they communicate with us/how will we communicate with them/how can we remove all the hundreds of barriers that exist in the real estate process? Which involves increasing speed of conveyancing/property finance – so big hurdles.

    Instead they built Frankenstein’s monster a cobbled together part tech part human machine that lowers rather than heightens the consumer experience. By 2020 I should be able to tap my mobile, see a target property, seamlessly view, offer and buy the product with minimal disruption to my life, just like I buy a pair of jeans online. After all it is just a transaction.

    But no, I as buyer have to brace myself and jump over numerous hurdles, and then when I find the property – even more delay, cost and frustration.

    The good news is that the younger generation will not put up with it, their 10-second slot of patience will drive a digital bulldozer through the process, and one by one the old ways will be replaced by new thinking and new ways.

    And Julian I totally agree with you – the new agent starting today, has to be the master or mistress of so many things. A digital analyst, understanding what tech to use or not use, they must deal with the change in the way employees want to work and be managed (a good thing) and the cost of entering the field are becoming higher and higher, for lower returns. When I started working for myself in the mid 90’s you needed a telephone (old school) a filing cabinet, a photocopier and a hardback diary, those days are far gone.

    What amazes me is that all the world had re-imagined itself in a digital way – but the property industry seems to be the last bastion of ‘doing things like we always did’ well has everyone noticed that many of the new kids on the block in property are flourishing because they do things in a new way, not to be clever – they are just hardwired to tech, it is in their DNA, they do not think they are being extraordinary they are just doing business as usual.

  2. Very informative article, Andrew. Thank you.

    I agree, the online agents simply bought attention and no engagement. I have debated this with that fount of all online knowledge, Russell Quirk, and he remains unconvinced that message has much to do with subsequent engagement.

    All we have ever had from online agencies are meaningless platitudes and detachment. Had they engaged in a conversation with local communities, for minimal cost via blogs/podcasts/video, on platforms that they owned, they might have succeeded.

    Maybe that’s too much like hard work?

  3. I own both types of company:

    Most traditional startups typically aim to make a profit / have monthly banking exceeding outgoings in year one, else they close down because it is not just the physical costs it is the opportunity cost of not earning a salary from another job that needs to be added. Starting in January (2007), we started banking by June and it was well above costs by December. If you can’t do that or roughly then I’d not risk it. Traditional is a lot less risky because the agent usually has local connections to help kick it off.

    Internet models are horrendously expensive to advertise (particularly rightmove) and can be to develop if you happen to not be a software architect (like me). They have very low income, no personal / local connections and national competitors, so ultra high risk. They also do have premise costs like rent as here where I am, a shop is actually cheaper than an office!

    Personally I think anyone would be mad to open either now.

What's your opinion?

Please note: This is a site for professional discussion. Comments will carry your full name and company.

This site uses Akismet to reduce spam. Learn how your comment data is processed.