The Agency Problem
Updated: Sep 3, 2021
The first blog post I ever wrote was nearly twelve months and over 30,000 words ago. This week, I discovered that the subject matter has an actual name.
Here’s me, quoting me…
“The reason why so many members of the general public have such a poor view of agents is the one question which has consistently troubled me over the course of my career.
Personally I think it stems from a perception that interests are misaligned, and as an industry we definitely haven't done enough to challenge this”
As it turns out, what I was describing is called The Agency Problem, amongst other things.
Here’s a summary;
“The principal–agent problem (also known as the agency problem) occurs when one person or entity (the "agent"), is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the "principal”
The problem typically arises where the two parties have different interests, such that the principal cannot directly ensure that the agent is always acting in their (the principal's) best interest.”
If you’re wondering where I’m going with this then (a) thanks for persevering for this long and (b) I’d be very grateful if you didn’t quit now.
Oh, and (c) It’s because two recent news stories caught my attention.
The first is that perhaps unsurprisingly, disgruntled consumers made over 34,000 complaints about estate agents to The Property Ombudsman last year, which is a rise of nearly 30% on the 2019 number.
The second was a survey of estate agency fees in nearly 30 countries. The UK was ranked 24th.
That’s right. Move to sunny Mexico, sit on a beach, drink cerveza and eat wonderful food. Sell the odd home. Repeat.
On the other side of the same coin, I read this week that the number of agencies representing buyers has doubled in the last four years. Clearly there’s a demand to be satisfied here.
As an agent, when you deal with a buyer who has representation, things become a little easier. Not least because everything is far clearer. I’m representing the seller, you’re representing the buyer.
It also makes a lot of sense, particularly against a backdrop of a remarkable twelve months in the property market. When things are competitive, good advice can make the difference between being repeatedly gazumped and securing your dream home. A worthwhile investment, for sure.
However what you get above all else from a buy side agent is a large slice of accountability. They have fewer clients, because they’re expensive.
Actually that’s not true, they’re great value. They’re just not something we’re used to paying for.
They’re also far stricter about what they will, and won’t do. Most refuse to deal with two clients who are looking for similar properties, because there’s a clear conflict of interests.
Which kind of takes us back to estate agency fees. Why isn’t it a service which the UK values more? After all, we’re helping people with what in most cases is the largest single transaction of their lives. People should love us, but sadly, they really, really don’t.
In this instance, “it’s too expensive” doesn’t mean “there isn’t enough money to pay for that” but rather, “it’s not worth it”.
There is, of course, the Freakonomics problem. Estate agents are paid as a percentage of the final sale price, and the financial incentive to achieve an additional £x isn’t obvious. Here’s Levitt & Dubner
“It turns out that a real-estate agent keeps her own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house.
When she sells her own house, an agent holds out for the best offer; when she sells yours, she encourages you to take the first decent offer that comes along”
To avoid this, our potential customers are forced to rely on something else. Trust. Which deserves a blog post of its own. Not for today.
It is however key, because once you have trust, you have also created perceived value. As usual, Seth says it’s so much better than I can.
When you don't need everyone to buy what you sell, "it's too expensive" from some is actually a useful reminder that you've priced this appropriately for the rest of your audience.
So for the time being, you’ll find me over here. Giving clients a lot of time, attention and hopefully, my best work. Truth, transparency and accountability. Always.
Not for everyone, but that’s ok. If we end up achieving the outcome we’re both focussed on, you might pay a lot.
But importantly, you’ll get far more than you paid for.
Things I’ve been inspired by this week
Skin In The Game is my first foray in to the writing of Nassim Nicholas Taleb. He’s a Lebanese-American essayist, mathematical statistician, former option trader and risk analyst, whose work concerns problems of randomness, probability, and uncertainty.
It takes a while to get used to the fact he has a bit of an attitude, but once you do it’s a brilliant read with some real laugh out loud moments.
There is a familiar story of a New York banker vacationing in Greece, who, from talking to a fisherman and scrutinising the fisherman’s business, comes up with a scheme to help the fisherman make it a big business.
The fisherman asked him what the benefits were; the banker answered that he could make a pile of money in New York and come back to vacation in Greece; something that seemed ludicrous to the fisherman, who was already there doing the kind of things bankers do when they go on vacation in Greece.