Estate agents earn commission from selling houses and may also generate extra fees from other services like lettings, valuations and surveys. Our guide covers the key issues for starting and running your own estate agency.
- Research your target market
- Decide which services to offer
- Price your services
- Selling financial services
- Buy an existing business
Research your target market
When you plan your estate agency business it's important to understand your market and to make an assessment of the amount of existing competition. Doing some market research will help you with this.
Know your market
Ideally, you will already be very familiar with the locality in which you intend to start up in business. If you are not, you should find out as much as possible about the surrounding area, focusing on the types of houses present and the people who live in them.
Test your knowledge of the following:
- place names and street names
- the types of houses and other property to be found at different locations, including the age of housing and the way in which it is built
- the types of people living in the area
- other features of the area, for example the reputation of local schools and the presence of other amenities, leisure facilities and so on
- the local employment market
- the background of different areas - are they property 'hotspots', 'up and coming' or declining? What is their history?
- local house prices, including current and recent trends
How much competition is there?
It's essential to understand who your key competitors are. Competition in the estate agency market comes from other local agents, large national concerns with branches in your area, online 'virtual estate agents' and other web-based property selling services.
Other estate agents
Your main competitors include other estate agencies in your selling area who offer a similar service to your own. A browse on Yell.com will give you an idea of the number of firms operating in your area - pay special attention to the location of branch offices. Also, look through the property section of your local newspaper/s for the names and locations of agents active in your area.
Make a note of the types of property that they are advertising, the range of services that they offer and whether or not they specialise at all. Look out for branches of major national and regional chains. You could select, say, ten or so offices in your area that you think will be your most significant competitors and visit their premises. Make a note of how their outlets look and feel, where they are located and the attitude of their staff. You could also try to find out about their fees.
It is not necessarily a disadvantage to be located near to several of your competitors. Many prospective property buyers will wish to look at a wide range of properties and will visit a number of different agents (although be aware that fewer and fewer people hunt for properties by doing the rounds of estate agents' offices, preferring instead just to search the major property portals on the web).
Remember that estate agency is quite an easy market to enter and a large number of opportunists may set up in business at times when the property market is very buoyant. Some of these may work from home and take advantage of their low operating costs to undercut more established agents' fees.
Competition from other sources
A number of alternatives are available to property vendors who don't want to use the services of a traditional estate agent. These include:
- virtual estate agents that offer estate agency services online but have no high street premises (although some do use locally-based agents to deliver certain essential services like valuations and advice)
- online property marketing websites and portals, particularly those which enable private sellers to market their own property without an agent
- 'property shops', which usually provide a limited marketing service, often for a fixed fee
- solicitors' property centres
- private classified advertising
Find out about such alternatives available in your locality, and think about how you will attract clients away from these options. Online virtual estate agents in particular are gaining in popularity thanks to their competitive fees and the fact that more and more people turn first to the web when they're looking for services like estate agency. Consider ways in which your business can benefit from the internet - a good business website is probably essential. If you're going to be operating as a traditional high street or online estate agency in the mainstream domestic property market then it's probably more or less essential to sign up to an online property marketing service such as Rightmove, Zoopla or OnTheMarket.
Research current trends, plus legal and tax issues
- Sector trends for estate agents
- Legal issues for estate agents
- VAT rules for estate agents
Decide which services to offer
Think about the range of services that you will offer to your clients. Some of these may earn you extra income, others will help to attract new business by adding value to the core estate agency service that you provide.
Fee-earning services
Examples of fee-earning complementary services that you might offer if you or a member of staff are qualified to do so include:
- surveying
- valuing (market valuations of residential properties for prospective vendors are, however, often undertaken free of charge)
- energy performance certificates
- auctioneering
- financial services such as mortgage arrangement and insurance sales
- conveyancing
- residential, commercial and holiday lettings and property management
- relocation services
It is important to decide on the services that you will offer at an early stage in your planning so that any statutory requirements can be met. Professional surveyors must be qualified members of the Royal Institution of Chartered Surveyors (RICS). Conveyancing may only be undertaken by a licensed conveyancer or solicitor, while anyone offering financial services must be authorised to do so by the Financial Conduct Authority (FCA). And if you want to produce energy performance certificates (EPCs) on your own account instead of referring the work to a specialist third party then you or a member of staff will need to be an approved EPC assessor.
Think too about specialist types of estate agencies that your business might offer. These include upmarket and exclusive residential property, commercial and industrial property, specific types of business (for example pubs and hotels), on-site sales for property developers and agricultural land sales.
If you're based in a large city, particularly London, then there may be opportunities to work on a sub-agency or 'shared commission' basis, collaborating with other agents to sell properties on their books in return for a share of their commission. The lonres.com website includes a database of properties on the market in the London area and is a useful resource for registered specialist sub-agents.
Added value services
Examples of some added value services that you might offer to your clients include:
- online marketing (through your own website and/or through that of a third-party specialist). If you're going to be operating in the mainstream domestic property market it's probably essential to sign up to an online property marketing service like Rightmove
- participation in a national property marketing scheme
- other innovative property marketing strategies
Think about how you will market property on your clients' behalf, and the level and quality of service that you will provide. Give some thought to how you will differentiate your business from your competitors, particularly the large national chains. Decide what services, if any, will be charged as extras - for example, it is not uncommon to make an extra charge to cover some of the costs of advertising a property.
Price your services
Estate agencies can be very competitive and it is important to set your fees at the right level. They should reflect the level and quality of the services that you offer. Two important factors to consider when setting your fees are:
- the amount that you will need to earn to cover all of your operating costs and make an acceptable profit
- the going rate in your area for the type of service that you will be offering
Try to find out what other agents in your area charge. Compare their service with that which you intend to offer. Find out what is included in their charges - and what isn't. Be aware that online and virtual estate agencies have developed innovative low-cost charging models, and many charge very low fixed fees for a basic estate agency service.
Seller's commission
You will probably charge your clients an agreed percentage of the eventual selling price - this is your fee or commission. As a general rule, the more expensive the property, the lower the commission rate that your clients will expect to pay you. Other factors that can affect the level of commission you charge are the state of the property market and whether or not you have sole selling rights to the property ('sole agency' agreements usually attract a lower rate of commission than 'joint agency' agreements).
As a rough guide, you would normally charge somewhere between 1% and 3% of the selling price as commission. A similar rate would normally be charged for auctioning property. Decide whether your commission fee will be fully inclusive, or whether certain services such as advertising the property will be charged as 'extras'.
If you operate as a sub-agent on a shared commission basis then you will earn an agreed share of the selling commission available on each property you sell on a main agent's behalf.
On some occasions, you may agree to sell a property on a fixed fee basis, for example as a special introductory offer or at times when the market is very flat.
Letting commission
If you decide to offer residential and holiday letting and property management services you will probably charge your clients (the owners of the let property) a percentage of the monthly rent as commission. 10% to 20% is common, depending on the level of service that you offer and the amount of local competition - in a very competitive market some agents might offer a basic service for less than 10%. Around 15% to 25% is fairly typical for holiday lettings, and rates may vary according to whether it is high or low season. You might also charge a one-off finder's fee, admin fee and/or other up-front fees to tenants (although note that in Scotland, it is illegal to charge extra up-front fees to tenants with the exception of a refundable deposit). If you do charge any such fees to tenants you must by law publish details of them clearly and prominently. Remember that charging up-front fees to tenants will be banned in England and Wales in the future.
Other commission
You might also charge a commission-based fee for some of the other services that you offer. Examples include commercial stock valuations (a commission of around 5% of the value is typical) and auction sales of items other than property (a commission of up to 15% is typical).
Fixed fees
You may provide some services on a fixed fee basis. Conveyancing and surveying are, for example, normally undertaken on a fee basis. It's quite common to quote a fixed standard fee for such services, charging extra on a time basis for any additional work that is required. Your fees for services such as this should reflect the current going rate in your area.
Selling financial services
Very many of the people who visit your outlet will need advice on arranging financial services such as a mortgage, household and life insurance and so on. You may decide that your business is well placed to offer this service - some home buyers will welcome the convenience of arranging everything under one roof. This is often referred to as 'linked selling'. However, never pressure property buyers and sellers to purchase 'tied-in' services from you - they should always be free to make up their own mind.
If you want to offer financial services you (or a member of staff) must be properly qualified and must be authorised to do so by the Financial Conduct Authority (FCA). The FCA will be able to advise you of the rules and regulations that apply to you as a financial services intermediary. Your authorisation may need to cover consumer credit activities if you want to operate as a mortgage broker, depending on the range of credit products you sell and advise on (you will also need a relevant mortgage qualification).
You will probably become an agent for one or several mortgage lenders and insurers. Shop around to determine which ones are best to do business with - think about their name and reputation, the quality of the service that they offer, the suitability of their products for your clients and the competitiveness of their prices and rates.
In return for selling their products, lenders and insurers will normally pay your business commission. Commission for selling mortgage finance varies, up to about 3% of the value of the loan. Commission for selling insurance products can be considerably higher.
Be aware that recent years have seen a number of mis-selling scandals involving various financial products and insurances, so do make sure that any information and advice you and your colleagues give to customers is accurate, fair and honest.
As an alternative to offering financial services in-house, you could refer clients to a specialist financial adviser. In return, he or she will usually share the commission earned with you, or possibly pay you an agreed fixed sum.
Buy an existing business
You might decide to buy an existing estate agency business rather than start your own venture from scratch. Buying a going concern normally means that:
- the premises and equipment are already in place
- there are established customers - a portfolio of current property 'instructions'
- the business has an established name and reputation
- the business can generate income immediately
- online property marketing portals have been identified and relationships established with them
- there is a business website
- the business has a track record which can help if you are looking for finance
- staff may already be in place
However, look critically at any business that you are interested in to make sure that the price you negotiate with the seller is a fair one. Try to establish why the business is for sale - for example, is the owner keen to retire or is there another personal reason for selling up. Check that the business's reputation is a good one and that it has not become known for sharp practice or unfair dealing.
It is also worth checking who will be receiving sales commission for properties currently on the books, particularly those where the sale is progressing - you or the person/s selling the business. Either way, the valuation of the business should reflect this.
Your market research into the sector as a whole and the locality in particular will help you to establish whether or not the owner is selling because he or she can no longer generate enough income from the business. This may not necessarily deter you - many business people are confident that they can turn a failing business around. The important thing is to have established the current position so that the price you pay for the business is not too high.
Other matters to consider include:
- the state of the premises, equipment and so on. Will you have to spend money refurbishing or replacing assets
- existing staff rights
- how to retain key personnel once you've taken over - this can be particularly important
- does the business owe money that you will be responsible for
- if you are paying for goodwill, to what extent does this depend on the skills, experience and personality - and contacts - of the seller
Ask your accountant to look critically at the business accounts for the past three years and discuss with him or her the selling price in the light of what the accounts reveal. Make sure you budget for other professional fees such as legal fees.
Consider whether you will require the seller/s of the business to sign a legally-binding undertaking not to engage in estate agency activities within a certain geographical area and for a specified length of time. You may have to include an extra amount in the purchase price to pay for this 'golden handcuffs' arrangement.
Franchises
Franchising can be a good 'halfway house' between starting out from scratch and buying an existing business. If you purchase a franchise you'll still be setting up your own business, but you could benefit from the experience, resources and brand name of a business that is already successful.
There are several franchises available in the estate agency and lettings sectors. Some are national and some are more locally based. Although different schemes vary a bit in detail, most feature the following key points:
- as a franchise holder, you will remain self-employed but will use the identity (corporate colours, logos, trade name and so on) of the franchisor
- in return, you will pay the franchisor a fee - this might be a one-off investment, a monthly charge, or a combination of both
- both you and your franchisor will have to fulfil certain obligations and maintain certain minimum standards
Some franchisors will provide you with any specialist training you require, help with advertising and marketing, and advice and support on a range of business and technical matters.
Details of the above points are set out in the franchise agreement or contract, which both you and your franchisor will sign. The agreement will also deal with other matters, for example any territorial exclusivity due to you and the minimum period for which the franchise will run.
Before entering into a franchise agreement, it is advisable to compare the terms of different franchisors to be sure that you are getting a good deal. Go through the contract with your solicitor before signing anything. More information about franchising is available on the Franchise Info website. Information is also available from the British Franchise Association (BFA).