Estate agency - why the model is broken and why it has to change

There are a number of professions which are universally hated by their customers and none more so than Estate Agents. In a 2004 survey http://news.bbc.co.uk/1/hi/uk/3405295.stm by Horlicks, estate agents were the third most hated profession, pipped to the post by Bouncers and Traffic Wardens. Bafflingly, I hearb that Tesco and Asda are looking at getting into this market. Why would they want to join this hated professsion? So why are Estate Agents so hated? I can already hear you across the ether, venting your spleen, spitting vitriol and telling shameful stories about your experiences. But I bet most of the examples could be distilled down into one underlying issue, that of trust, or rather, the absence of it. You see, we all know there is something wrong with the whole set up but most people can't quite put their finger on it. As a seller, we do not see the real offers, we don't hear the conversations with the buyer about how low we, the buyer, will go. We simply don't know. So when we read that Estate Agents sell their houses for more that they sell a comparative one (get the evidence from a great read called Freakonomics) we worry about if we are being conned. And there is nothing an englishman hates more than dishonesty.

The fact of the matter is, Estate agens are compromised by their business model. And as long as we keep paying them according to the model, they havethe upper hand. Look at the example below:

I am selling a house and am asking £1million. My agent charges 2%

If they sell it for £1 million they earn £20,000.

However, for every £10,000 they get above my asking price they earn only £200. That's a lot of extra effort to earn very little extra. In fact if they sold at £500,000 they still earn £10,000 which explains why they do not care about how high they sell, simply that they do sell. At any price because there is simply no incentive for them to try very hard.

But it gets worse. If a corrupt buyer offers the agent an inducement to sell for less than the asking price, the economics really stack up against you:

Say buyer offers £1000 inducement (worth £50,000 of estate agent effort) for every £5000 'saving' the estate agent can obtain for them from the vendor (the £5000 saving only costs £100 in lost commission).

It's no wonder we can't trust them. So its time to renegotiate when selling your house. Ask the Estate agent to sign up to a scheme whereby obtaining a Base Price (the price anyone could sell the house at) earns them nothing and exceeeding the market price earns them lots more. This mechanic will both incentivise them to perform their best but also remove the incentive to cheat.

Here's a model:

£1million market value. Agree £800,000 Base Price (the price I could sell myself to anybody because its so cheap).

First £200,000 above Base Price negotiate say 5% commission = £10,000

Then offer for every 10% for next £100,000 = £10,000 more commission

Then offer the agent a whopping 20% for anything they get over that amount. Infact, you could go even higher depending on your belief in the market or recalibrate the whole scheme if you are in a hurry to sell. Either way, they will now be on your side.

It would be amazing how we might change our view of Estate agents if everyone did it like this. In fact, eeryone wins so why not? Come on Tesco and Asda, why continue this appaling situation. Be brave. Be imaginative.