Lifetime value of a sales customer vs lettings customer
In my first (ever!) blog, I’m going to share with you some interesting calculations that should give you some food for thought about your sales and lettings split.
Having worked in the industry for over 20 years, I am still baffled by the bias towards sales that continues to exist in many estate agency businesses. Even with the knowledge we have that a managed portfolio creates the bulk of the value of our businesses at the point of exit, as well as the awareness that when the market drops (COVID-19) property management generates recurring revenue which could be the difference between success and failure.
A quick glance on the web tells me that there are 22,000 sales branches on Rightmove but less than 16,000 letting branches. Therefore 6,000 estate agents that have successfully set up their agency, who have a brand, an office, a database, staff and marketing spend seemingly still don’t offer lettings.
Now I could be doing these 6,000 estate agencies a disservice - it could be that these agencies do offer lettings and property management services within their ‘estate agency’ brand but like a potential customer does, I’m browsing the biggest online portal and that information isn’t instantly obvious to me so I’m assuming they don’t offer those services.
In fact, the words ‘letting’ and ‘property management’ rarely feature in the brand name unless it’s a specialist lettings or property management business which is why these specialist businesses have been able to thrive and they’ve probably only started up in the last 5 years, whereas your estate agency database goes back decades and at some point you have sold a property to or for many of the landlords in your area.
Sorry I digress, back to these numbers I promised you.
Lifetime value of a sales customer
The average property price in the UK is £231,185 (Land reg data Jan 2020), the average fee charged exclusive of VAT is 1.3%, and according to research conducted by Zoopla in 2017, the average homeowner moves every 23 years (I accept there is some ambiguity over this stat). The mortgage advice bureau suggests the average commission for a mortgage sign up is £300 and kerfuffle research suggests that the average commission for a conveyancing referral is £165.
Let’s be nice and presume that we do such a great job that we (achieve) vendor loyalty and they instruct us on the 3 sales during their lifetime. We are also going to presume it’s a perfect sale and we get buyer and seller conveyancing referrals with the added benefit that they both have an associated sale/purchase meaning 4 referral fee’s each sale. And finally, that in every case we get buyer and seller mortgage sign up.
So we have 3 sets of exchange commission totalling £9,016, 12 lots of conveyancing referral fee totalling £1980 and £1800 of FS commission. The grand total being £12,796. If we now use the basic metric that we exchange on 65% of our instructions, the lifetime value of a sales instruction is £8,317.
Lifetime value of a lettings instruction
According to The 2018 English Private Landlord Survey (EPLS) commissioned by the Ministry of Housing, Communities and Local Government in 2018, the average time a landlord let their property was 11.5 years.
The average monthly rent in the UK is £959, the average tenancy is 20 months and I believe the average management fee is 13%. Therefore, managed fee’s alone suggest that the average instruction is worth £17,204, this is not taking into account the additional income you make on each tenancy (6.9 tenancies over lifespan) these will include landlord set up fee, renewal fee’s, deposit protection income, contractor clips, rent protection policy income, utilities referrals and the list goes on… I would hazard a guess that the ‘extras’ amount to an additional £450 per tenancy, throw in 4 remortgages for the landlord over the course of the 11.5 years and you are up to £21,509. As we are making our presumptions on the perfect scenario I think it's fair to assume that after an 11.5 year relationship that you could be confident in getting the sales instruction so using the numbers as per the sales workings, we can add £2772 (taking into account 65% exchange ratio) which takes the grand total to £24,281. Whilst I have no set figures, I am confident that we let/move in 80% of our lettings instruction which means the value of a letting’s instruction is £19,424.
This is Ignoring the fact that 38% of landlords own between two and four properties and 17% of landlords own five or more properties, therefore simple math suggest that you have a 55% chance of your landlord owning more than one property which comes with zero cost of acquisition (COA).
How is your business split?
Just take a moment to consider how do you distribute spend between sales and lettings? I don’t just mean marketing spend, consider training, people, systems, prop tech, and, as importantly your energy and focus?
One final point to consider…
Whilst the value of a lettings book is derived from a number of complex mechanisms, in a basic sense lettings books will trade at 1.4 times revenue. Using the above presumptions of £959 average rent at 13% management fee plus £270 addition income per annum, the total income works out to be £1766 per property, multiplied by 1.4 and you get a cost of acquisition (COA) on purchasing a lettings book would be £2,472 - on a landlord that you have no relationship with and that hasn’t chosen you. Are you spending £2472 to source a new landlord? One who does chose to use your agency based on its merits rather than forced to use you due to a contractual tie from a previous agent.