It's tempting to think that the best way to build up any estate agency business is to take on more and more instructions. After all, more sales or lettings mean more commission, don't they?
Possibly in the short term, but in the long term, you may be hollowing out your business and going down the path that leads to poor returns and ever reducing profits.
Most agents will know that you can obtain reports that show which agencies have the greatest disparity between their original asking prices and actual selling prices. If they read these reports regularly, they will know that the same agencies tend to be at the top of the list. Why? Because they are making a habit of overvaluing to get instructions and then pressuring the disappointed seller to make a substantial reduction in the asking price, in order to get a sale.
This is a typical example of going out to get sales at any price, but it can have several unforeseen consequences that cause long-term damage to a business. No agency wants to get the reputation among potential customers that it is, "good to buy from but not so good to sell with". Agencies can get this unwelcome reputation by taking on more instructions than their office can fully service, by promising great sale prices then forcing customers to slash them and by taking an aggressive stance in order to get the business. That includes turning up for a valuation with a photographer.
Underlying this short termism is temporary amnesia as to who is actually paying the bill. The seller's interests must always come first, because they are your customers.
Obviously, once the agency is perceived locally as better to buy from than to sell with, they will end up in a situation where they have plenty of people registering to get details but very few details to send them, as people are instructing other agencies to sell their property. Exactly the same process goes for letting - it's no good having queues of tenants if you have no properties to let.
The other way that agencies fail is to cut commissions in order to get business. This is a legitimate business strategy if it is thought out in advance and the risks and benefits are carefully weighed up. So for example, it may be a sensible move for a new agency which wants to get plenty of boards up around town, almost as much for marketing purposes as anything else. It can also be a good strategy for agencies which have a rock-bottom, internet-only business model, as long as they have rock-bottom costs to match.
It isn't a strategy for building a long-term business, because reducing commission isn't sustainable in the long term. There's no point taking on lots of instructions that barely pay the business rates. All that will happen is that you'll find yourself too busy running around preparing Rightmove pages to answer frantic phone calls from the accountant telling you you're in trouble.
The agencies that are making a decent profit, even on a smaller number of instructions, are able to invest in the business, especially in technology such as mobile apps, social media and their internet presence, so that they can keep up with the best in the market and attract quality buyers. It's a more thoughtful way of doing business and growth may come more slowly, but it's also more sustainable than rushing about town engaged in a race to the bottom with your nearest competitor.
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