Estate Agents Heading for Potential Insolvency
Estate agents insolvency is on the rise. Recent industry figures suggest that 19% of estate agents are showing potential insolvency. This equates to nearly 5,000 businesses and companies across the UK. The key signs highlighted include:
- Accruing losses on the balance sheet.
- Being unable to pay debts as they fall due.
- Cheques being dishonoured or post dated.
- Constantly trading at your overdraft limit.
- Creditors threatening legal actions.
If these issues sound familiar, it may be time to consider your options.
What are the causes of estate agent insolvencies?
Income for estate agents is, typically, generated from three sources:
- Commission as a percentage on the sale of any properties they have marketed.
- Commission on rental income collected on behalf of landlords.
- Letting agent fees charged separately to tenants.
Due to current market conditions, all of these income sources are under threat:
- Competition from online only sellers offering fixed fees for property marketing.
- Market saturation increasing competition on the high street.
- A fall in the number of property sales of 32%, from 10 years ago.
In addition to these conditions, several types of letting agent fees are scheduled to be banned in the next two years. The outcome of this ban means that agents will need to recover costs from landlords. This will likely have a twofold effect, putting even more estate agents at risk:
- Landlords may be more likely to rent directly to tenants reducing the size of this market for estate agents.
- Estate agents will need to be more competitive on the fees they charge landlords, reducing their margins even further.
What can be done to avoid insolvency?
The quick answer to this is to adapt to the modern market. Traditionally, the structure of an estate agents involved numerous offices with a high staff count. However, this is not competitive with the structure of online only sellers.
It is also necessary to consider where costs can be reduced and reputation can be gained. The issues with letting fees have given estate agents a bad reputation and it is imperative to shed this.
Embrace modern technology
There is a greater need to embrace technology to attract the modern client. This can include:
- Using 360 virtual tours.
- Link to apps such as Google maps to show the local area and amenities.
- Changing the business model to online only.
- Criteria searches with automatic alerts for potential buyers.
- Use of drones to improve property photography.
Reduce or eliminate office costs
Historically, the main tool for an estate agent was a showroom for the properties on offer. However, with the rise of the internet, this no longer appeals to the younger generation more likely to move house. Sales contracts are almost never signed in an office and staff are generally on the move dealing with valuations, photography and viewings. Therefore, the requirement for expensive town or city centre offices is almost redundant. The older generation may prefer to come into an office, but, according to the Survey of House Moving for 2015-2016, 86% of people moving in this period were under 44. This age range is also more likely to use the internet.
A stronger office model is to have a smaller accessible office, with a much cheaper out of the town centre unit for the remaining staff. You could even have staff working from home.
Be open about costs
The biggest controversy with the lettings fees was that they were viewed as hidden costs and often inflated. A recent example, is an estate agent charging around £80 for credit searches and a further admin fee of £75. In reality, a credit search actually costs around £14 and the remaining £66 is an admin fee. To charge an additional admin fee of £75 is double charging the customer for the same product.
With the banning of letting fees such as this, there is a grumbling within the industry that estate agents will charge the same fees to the landlord, instead of putting up rents. This prospect is unlikely for one major reason. It is far easier for a landlord to shop around for an estate agent, than a tenant. All landlords accept that they will be charged a commission if an estate agent finds a tenant and collects rent. However, if one estate agent can get the same amount back to them, or more on a lower rent than another, they will likely go there. This is not only for the increased return, but a lower rent makes it easier to attract a tenant.
In short, if you want to make an admin charge on top of the actual cost of taking an action – call it what it is. Get ahead first as the market changes in response.
What will a liquidator look for?
If it becomes necessary for an estate agents to enter liquidation, there are a number of industry specific assets they will look at. This is alongside office equipment and vehicles:
- The current tenancy agreements and how much commission is due on their remaining term.
- Contingent value in any current listings.
Both are classed as work in progress and would need to be purchased, if the business is to continue as a going concern. Where an offer has been accepted on a property and has been passed over to solicitors, this will be classed as a debtor. Any realisation would need to be paid into the insolvent estate.
It should also be noted that any deposits taken as security should be held in a separate client account. Failure to safeguard these funds can be seen as an offence and may result in disqualification proceedings being taken. These deposits should only be mixed with the regular funds collected, in the event that they are utilised in lieu of rent arrears or damage to the property.
Any funds collected on behalf of landlords should also be held in a separate client account. Commissions can then be deducted to the office account and funds set aside to be paid to landlords in the event of insolvency.
If you feel your estate agency may be heading for insolvency, contact one of your business rescue experts for free advice.