Why Do So Few Online Agents Make Any Profit?
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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 – The Negotiator Magazine 7th January 2020 3 Comments 21,115 Views 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 online/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 for 32 years, who has worked for both Countrywide, Sequence and his own multi branch agency. He now works as an industry proptech real estate consultant, analyst and journalist helping agents improve their businesses from both a traditional and proptech perspective. Visit his website. .