Exploring Commission Reduction in the UK Real Estate Market

A recent multibillion-dollar settlement in the United States has paved the way for new ways of selling real estate. This could mean the end of the standard 6% commission on home sales.

Home sellers in America are hopeful about the possibility of paying lower fees, while real estate agents are concerned about potential income cuts. Looking at similar changes in other countries can give us an idea of what might happen next.

A wave of affordable online real estate agencies has disrupted the housing market in the UK. These agencies provide sellers with competitive fixed fees for a basic set of services upfront.

One example is Purplebricks, which boldly claims on its website, "Sell your home for free. No bull." Established ten years ago, Purplebricks offers sellers a valuation and listing for free, providing everything necessary to sell a home.

Sellers have the option to pay for additional services that are commonly offered by traditional real estate agencies. Many sellers opt to do so. For example, Purplebricks charges £899 ($1,142) for property viewings conducted by one of its agents, and £699 ($888) for a package that includes professional photos.

However, even with these additional costs, sellers still get a better deal compared to the typical fees charged by traditional brick-and-mortar agents. On average, a UK homeowner can expect to pay £2,850 ($3,616) for a property priced at the national average of £285,000 ($362,022).

The Zillow website on a laptop computer arranged in Hastings on Hudson, New York, U.S., on Sunday, Nov. 7, 2021.

The Zillow website on a laptop computer arranged in Hastings on Hudson, New York, U.S., on Sunday, Nov. 7, 2021.

Tiffany Hagler-Geard/Bloomberg/Getty Images

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Zillow is concerned about the shakeup in America's housing market. According to Nathan Emerson, the chief executive of Propertymark, a trade body representing 18,000 real estate agents in the UK, including Purplebricks, the average agency fee is 1%.

Online agencies only made up 5.5% of homes sold in the UK in the last quarter of 2023, as reported by property data firm TwentyCi. This percentage decreases as the property value goes up.

Despite this, Paula Higgins, who is the chief executive of the HomeOwners Alliance, believes that the rise of agencies such as Purplebricks has brought significant changes to the UK real estate market. It has made the market more competitive and transparent.

The National Association of Realtors, a trade group with 1 million members in the US, announced on Friday that they have agreed to pay $418 million to settle an antitrust lawsuit. The lawsuit was brought by homesellers who claimed that the association had pressured them into paying higher commission rates.

As part of the settlement, the NAR has committed to implementing new rules that will change the current homebuying and selling process. Currently, sellers are required to pay a standard 6% commission, divided between their broker and the buyer's broker, based on the final sale price.

Alternative models of selling real estate, such as flat-fee and discount brokerages, are expected to gain more traction with the changes. Real estate commissions are also predicted to decrease overall due to the new regulations, as reported by TD Cowen Insights.

A 'do-it-yourself' service will likely become more popular as a result.

In Britain, new online agencies that charge flat fees have not lived up to the high hopes of the early 2010s, when Purplebricks became popular.

According to TwentyCi, these agencies saw their market share drop from 8.2% in the last quarter of 2019. TwentyCi began monitoring the data a year earlier. This decline may be because the established agencies were pushed to lower their fees and enhance their services.

"According to Higgins, the competition has pushed high street estate agents to improve their services. They now have a stronger online presence and are more transparent about their fees."

A "for sale" sign outside houses on a construction development in Nantwich, England, seen in June 2023.

A "for sale" sign outside houses on a construction development in Nantwich, England, seen in June 2023.

Christopher Furlong/Getty Images

Several UK online agencies have faced financial difficulties in recent years. The HomeOwners Alliance website, which used to list 15 online agencies, now only lists five.

Purplebricks, previously a top-performing agency, issued a profit warning last year. Following this, its rival Strike acquired Purplebricks in a rescue deal for just £1 ($1.27).

Sam Mitchell, the CEO of both companies, mentioned to CNN that 60% of individuals selling their homes through Purplebricks opt for a premium service. He also highlighted that the agency generates revenue from its mortgage brokerage division and by providing certain legal services.

Adam Day, overseeing the UK growth of eXp, a real estate agency from the US, expressed doubts about Purplebricks' free service model. He noted that the history of failed businesses utilizing a low fee structure raises concerns about the sustainability of Purplebricks' approach in the coming years.

Day, who started one of the first online-only agencies in the UK in 2006, mentioned to CNN that running an estate agency with low fees and still being profitable is not feasible.

Higgins, from the HomeOwners Alliance, offers a reason why these agencies have not been able to attract more sellers: "You may be paying very low fees, but it often means you have to do a lot of the work yourself."

Sellers are usually expected to do the majority of the work when working with agencies, from taking photos of their property to finding potential buyers and negotiating offers. This arrangement may not be suitable for everyone.

According to one expert, having a local estate agent can be beneficial as they may have clients who are specifically looking for properties in the same area. They could also have valuable insights about the neighborhood and potential buyers.

Emerson from Propertymark explains that in a challenging housing market, sellers often prefer traditional agents over online agencies. Traditional agents focus on completing a sale to earn their commission, while online agencies typically charge a flat fee to list a property, regardless of whether it sells or not.

“You’re paying for them to market your property. If it sells, it sells, if it doesn’t, it doesn’t, you still pay…. you’re not paying them to sell your house,” Emerson said.

Editor's P/S:

The recent settlement in the US and the rise of online real estate agencies in the UK have sparked a shift in the real estate industry. The traditional 6% commission model is being challenged by more affordable options, such as flat fees and discount brokerages. While these new models offer potential savings for sellers, they may come with limitations, such as reduced services and the need for sellers to take on more responsibilities.

It is important for sellers to carefully consider their needs and goals when choosing a real estate agency. Traditional agents with a local presence may offer valuable expertise and support, while online agencies can provide cost savings. Ultimately, the best option will depend on individual circumstances and the specific market conditions.