Home Brokers & Agents Is the U.S. Model Defensible vs. the UK Model?

Is the U.S. Model Defensible vs. the UK Model?

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I’ve been traveling almost every day for three weeks, so I know blogging has been very light. The projects I’m involved in now are fun as hell, hard as hell, and important as hell, so they kind of fit all my criteria for good stuff. But in any event, I thought I’d spend a few minutes to look at something that piqued my interest.

Over on Facebook, I got into a random conversation about eMoov, a UK “online real estate company” that’s getting some traction. Obviously, there are huge differences between the US model and the UK model, but I thought what eMoov was doing was interesting. And then it got even more interesting when my friend Jon Sterling, who is now with Keller Williams in London, posted a link to a fantastic post comparing the two. Read the whole thing.

Something in there got me super interested, in terms of defending the U.S. model against a very particular sort of criticism. Let’s dive into it.

The Gospel (of UK Model) According to Jon

I’ll try to summarize Jon’s excellent post, but I may just quote at length here. Seriously, it’s a good post.

No MLS.
No buyer agency.
No individual branding–everything is done in the name of the company and the company owns the customer relationships.
No independent contractor status. You either form your own company or you are on a salary.
No professional licensing or regulatory authority.
No RESPA.
Average commission is around 1.5%.
Solicitors (lawyers) are heavily involved in every transaction. They are responsible for the paperwork and closing process.
The average age of a REALTOR in the US is 59. Average age of a property professional in the UK is mid 20s.
The typical company size is 2-6 people.

That’s how Jon starts his post and that’s as good a summary as we might get. He has a lot of opinions about the differences, but as the result of the above, things are dramatically different.

Now, here’s the passage that got me interested:

Commission rates in the US are always negotiable and have historically averaged around 5-6% of the sales price when you look at the data from the past few decades. Commission rates in the UK are much lower (1.5% is the average across the UK in the current market environment). That might seem low, but the median sales price in the UK–especially in London–is much higher than the median sales price in most parts of the US. Plus, the listing agent is usually the only one earning a commission in a transaction.

The average sale price for a single family home in Central London in 2014 was just under £1,500,000 (USD $2,400,000), so 1.5% isn’t so bad when you look at the total dollars. Just like in the US, we will charge a full commission in the UK (2% is our standard) and provide superior service and marketing in exchange for our professional fee.

Opportunity: We are shifting the conversation from “cost” to “net dollars.” When we show sellers that we will net them more total dollars in a transaction, the size of our fee will become irrelevant. [Emphasis in original]

Now, I’ve asked Jon what the total transaction fees are for a UK seller. He mentioned that solicitors (UK lawyers) are involved with every transaction because the UK has a system called “conveyancing” where the property is transferred from the seller to the buyer. Lawyers do that conveyancing work.

I assume there are probably various registration fees and so on, and maybe a title search fee, or something else tacked on in the UK as well.

So, What Is My Net Dollar?

Where I got curious was what the “net dollars” that Jon mentioned is for a UK seller. Obviously, I don’t know all the fees/details, so if anyone with real knowledge wants to jump in, please comment below.

It appears at first glance that under the UK system, there are quite a few fees and taxes and such for buyers but very few for the seller. As far as I can tell, apart from the estate agent fee and legal fees (for “conveyancing”), there aren’t any other major fees. Sometimes, sellers have to pay a capital gains tax, but that’s the same as in the U.S.

The Estate Agent fee appears to be standardized around 1.5% in the UK. Of course, just like here, there are flat-fee brokerages, and lower-cost business models, and so on, but the standard seems to be 1.5%. Thing is, there is no MLS, no buyer agency, and no cooperation and compensation.

The legal fees for conveyancing also seems to range from 0.5% to 1%, with plenty of firms offering “flat fee” legal services that varies slightly based on the value of the home. For example, this law firm charges between £600 for homes up to £250,000 and £900 for homes over £750,000. (1.56 Dollars to 1 GBP, so that’s about $900 to $1,350.)

So someone selling a $500K home in the UK might expect to pay $7,500 for the estate agent, and maybe $1,000 or so for the solicitor doing the conveyancing. The net is $491,500.

The same house under the US model would be:

  • $500,000 Price
  • less 2.5% for listing agent ($12,500)
  • less 2.5% for buyer agent ($12,500)
  • less ~1% for closing costs ($5,000)

The net dollar is $470,000.

The difference between the UK model and the US model for the home seller is $21,500.

Here’s the question: What is the American homeowner getting for that additional $21,500 in cost?

How Much Is That Doggie in the Window?

Look at the list Jon posted above. Which of these things are worth $21,500 to the seller?

  • No MLS.
  • No buyer agency.
  • No individual branding–everything is done in the name of the company and the company owns the customer relationships.
  • No independent contractor status. You either form your own company or you are on a salary.
  • No professional licensing or regulatory authority.
  • No RESPA.

I can’t imagine that any seller anywhere would care very much about any of this except maybe (a) professional regulatory authority, and (b) RESPA. And it’s very much a stretch to suggest that consumers just looooove them some government regulations.

Perhaps the US home seller benefits by having all of those things, because his home would sell for more. Thing is, just to break even on the $21,500 gap between the UK model and the US model, the home sold under the US model would have to fetch $22,790 more than the UK home. Does that happen? I don’t know.

Does the existence of the MLS, and cooperation and compensation, drive home sale prices higher in the US vs. the UK? It’s impossible to know, isn’t it, since we’re comparing apples and oranges. No home that ever sold in the US can be sold in the UK, and vice versa, and it isn’t as if we can say this 3BR/2BA in Oxford, MS is identical to that 3BR/2BA in Oxford, Oxfordshire since location is kind of a big deal in real estate.

Nonetheless, it feels like a stretch to suggest that comparable (in terms of physical properties) homes are selling for $20K more in the US vs. the UK simply because the American REALTOR has access to a database.

What about cooperation? Incentivizing buyer agents to bring buyers to a home one is selling for a client might have such an impact, but again, I don’t know if we can say it has such a large impact. England, after all, has been buying and selling homes long before the Massachusetts Bay Colony was established. And in contemporary times, we hear nothing about homes languishing on the market in Ye Olde England because there are no buyer agents to guide buyers to this home or that home.

What about the fact that real estate agents in the UK are paid employees? Here’s a passage from Jon’s post that’s fascinating:

For example, I spoke with a negotiator when I first arrived in London who generated about £600,000 (USD $1,000,000) in fees for his company last year. He took home about £120,000 (USD $200,000). That means the company made about USD $800,000 from his efforts last year. Granted, they provided some basic tools, marketing and support, but seriously?! That’s a lot of cheddar to leave on the table.

After explaining how Keller Williams works and doing some quick math, we figured out the negotiator would have made about USD $600,000 MORE last year if he had been working with Keller Williams. His response to that was, “That’s great and I really like the Keller Williams business model, but what’s the basic salary?”

I do not find myself speechless very often, but I didn’t know what to say here.

Well, one thing to say there, I think, is “That’s fantastic for the broker!” There’s so much fear in the U.S. over the employee vs. independent contractor issue, but maybe brokers ought to embrace the salary model? Certainly, 80/20 split going the other way is something to ponder.

More importantly, however, there’s preciously little evidence that these employee-agents in the UK are failing to put forth the effort for the homeowner. Maybe KW will show in the UK that agents who are “entrepreneurial” (as Jon put it) sell clients’ homes for 5% more than the salaried estate agents, but as yet, there is simply no evidence that salaried employees (who also get a bonus) are lazy bums who don’t put out the effort.

No Need for Alarm, But…

Frankly, there’s no need for concern. The UK is another country. We might all be part of the Anglosphere, but it’s a totally different system they have over there. There’s little need for concern.

Having said that, the UK example does raise a number of interesting considerations for the issues we have right here in the red, white and blue.

And over the long haul, I do think there is some need for concern by the CEO’s of large companies, of MLSs, and others to at least think about. If selling a home in the U.S. costs $20K more than it does in the UK, there has got to be real value being delivered to the seller. As the world gets more and more interconnected — in the parlance of the NY Times columnist Thomas Friedman, “flatter” — what works in one country is quite likely to migrate over to another. If British homeowners are getting great service from employee agents who do not cooperate with buyer agents, then American homeowners are likely to start asking just what it is that they get for paying a whole lot more. The industry has to deliver, and make sure consumers understand that they are getting, the value for that extra cost.

Anyhow, just a fun little musing on the UK on the eve of the July 4th weekend, when we told the UK to kiss off. 🙂 Have a wonderful Independence Day everybody! God bless the United States!

-rsh