The article provides insights into the rising insolvency rates among estate agents and suggests ways to avoid or navigate financial difficulties.
Here are some key points and recommendations:
Estate agents insolvency is on the rise
Recent industry figures indicate that 19% of estate agents in the UK are potentially insolvent, equating to nearly 5,000 businesses.
Key signs of financial distress include:
- Accruing losses on the balance sheet.
- Being unable to pay debts on time.
- Cheques dishonored or post-dated.
- Constantly trading at the overdraft limit.
- Creditors threatening legal actions.
Estate agents facing these issues are advised to consider their options.
What are the causes of estate agent insolvencies?
Estate agents traditionally derive income from three main sources:
- Commission from property sales.
- Commission on rental income for landlords.
- Letting agent fees charged to tenants.
However, current market conditions pose threats to these revenue streams:
- Competition from online-only sellers with fixed fees.
- Market saturation leading to increased competition on the high street.
- A significant decrease in property sales by 32% over the past decade.
Additionally, impending bans on certain letting agent fees within the next two years will force agents to recover costs from landlords. This is likely to have a dual impact:
- Landlords may opt to rent directly to tenants, reducing the market size for estate agents.
- Estate agents will need to enhance competitiveness in fee structures for landlords, further compressing profit margins.
What can be done to avoid insolvency?
To avoid insolvency, estate agents are advised to adapt to the modern market by considering the following strategies:
- Embrace Modern Practices:
- Shift from traditional office-based structures to models aligned with online-only sellers, which may involve reducing the number of physical offices and staff count.
- Cost Reduction:
- Identify areas where costs can be trimmed without compromising essential services or quality.
- Reputation Management:
- Address and rectify issues that have led to a negative reputation, particularly those associated with letting fees. Enhance transparency and communication to rebuild trust with clients.
By adapting to the evolving market and strategically managing costs while actively improving reputation, estate agents can position themselves more competitively and reduce the risk of insolvency.
Embrace modern technology
To stay competitive and attract the modern client, estate agents are encouraged to embrace modern technology. This involves implementing the following technological advancements:
- 360 Virtual Tours:
- Offer virtual tours of properties to provide a more immersive and interactive experience for potential buyers.
- Integration with Mapping Apps:
- Linking to apps like Google Maps to showcase the local area and amenities, providing clients with comprehensive information.
- Online-Only Business Model:
- Consider transitioning to an online-only business model to align with changing consumer preferences and reduce overhead costs associated with physical offices.
- Criteria Searches with Automatic Alerts:
- Implement advanced search criteria with automatic alerts for potential buyers, ensuring efficient and personalized property recommendations.
- Drone Technology for Photography:
- Utilize drones for property photography to capture unique and appealing aerial views, enhancing the overall presentation of listings.
By integrating these technological advancements, estate agents can enhance their services, appeal to the preferences of modern clients, and potentially gain a competitive edge in the market.
Reduce or eliminate office costs
Traditionally, estate agents heavily relied on expensive showrooms in town or city centers to display properties. However, with the rise of the internet, particularly among the younger generation, this approach is losing relevance. Today, sales contracts are rarely signed in offices, and estate agents are often on the move for valuations, photography, and viewings.
The need for costly town or city center offices is diminishing. According to the Survey of House Moving for 2015-2016, 86% of people moving in that period were under 44, and this demographic is more inclined to use online platforms.
A more efficient office model involves smaller, accessible offices, potentially supplemented by cheaper units located outside town centers. Allowing staff to work remotely can further reduce costs. This shift not only aligns with the preferences of the younger demographic but also ensures a more economical approach to estate agency operations.
Be open about costs
The primary controversy surrounding letting fees revolves around their perception as hidden costs, often inflated and lacking transparency. An illustrative example involves an estate agent charging £80 for credit searches and an additional £75 for administration. In reality, the credit search costs about £14, making the remaining £66 an admin fee. Charging an extra £75 for administration is considered double charging for the same service.
With the impending ban on such letting fees, there is industry concern that estate agents might shift these costs to landlords instead of increasing rents. However, this scenario seems unlikely due to a key factor: landlords have the flexibility to shop around for different estate agents.
While landlords understand they’ll be charged a commission if an agent finds a tenant and collects rent, they are likely to choose an agent that can secure the same or higher return with lower rent. This choice not only maximizes returns for landlords but also makes their property more attractive to potential tenants.
In essence, the advice is straightforward: be transparent about additional charges. As market dynamics evolve, staying ahead and adapting to changes with clear communication can position estate agents favorably.
What will a liquidator look for?
In the event of an estate agent entering liquidation, specific industry-related assets are scrutinized, in addition to office equipment and vehicles. These assets include:
- Current Tenancy Agreements:
- Examination of existing tenancy agreements to determine how much commission is due on their remaining term.
- Contingent Value in Current Listings:
- Assessment of the potential value associated with current property listings.
Both of these are categorized as work in progress and may need to be acquired if the business is to continue as a going concern. Additionally:
- Accepted Offers Passed to Solicitors:
- Offers accepted on properties and forwarded to solicitors are considered debtors, and any realization from these should be directed to the insolvent estate.
It is crucial to note several safeguards related to handling funds:
- Separate Client Account for Deposits:
- Deposits taken as security must be held in a separate client account. Failure to safeguard these funds may result in legal consequences, including disqualification proceedings. These deposits should only be mingled with regular funds if utilized for rent arrears or property damage.
- Separate Client Account for Landlord Funds:
- Funds collected on behalf of landlords should be held in a separate client account. Commissions can then be deducted to the office account, and funds set aside for landlords in case of insolvency.
These practices ensure compliance with regulations, protect stakeholders, and facilitate the appropriate distribution of assets in the liquidation process.
Need further help?
We have helped estate agents successfully turn their business around since 2010 during the last recession and financial crash, so we have a number of years experience within this sector.
Should your business be starting to suffer due to the present economic impact within the UK due to rising interest rates slowing down the housing market, make contact today to talk about your options on 01246 912052, or simply complete an online enquiry.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.