Leading UK barrister Ian Rees Phillips has raised several questions about the duty of care that online estate agents owe their customers.
In the opinion piece prepared for the UK PropTech Association (UKPA), Ian Rees Phillips of 6 Pump Court explores how the nature of up-front payment for estate agency services may create a conflict of interest between the online estate agent and property vendors.
Rees Phillips' fundamental concern is that online estate agents owe a fiduciary duty –the highest standard of care – to home seller clients and that there is a “significant danger that breach of fiduciary duty is baked into the online estate agent model.”
He argues that an agent "must not place itself in a position where its own interests conflict with those of the principal or where there is a real possibility that will happen; and it must not profit from its position at the expense of the principal."
The issue with upfront fees
In his piece, Rees Phillips states that issues may arise because of the main difference that exists between hybrid online estate agents and traditional agents: that of upfront fees.
"The difference with ‘hybrid’ online estate agents’ business models is that they receive their fee upfront (whether by payment by the vendor customer or by a loan financed by a third party) and their only obligation is then to list the property for sale, not to secure a sale of the property itself," Rees Phillips said
"Not only does this mean that the online agent owes the customer no obligation to ensure that the property sells by its best efforts, but that it actually has no incentive to do so, as its fee is not dependent upon any sale. In essence, the customer bears the risk that the property will sell, and whatever happens, the online estate agent gets its fee."
Commercial interest differs in a hybrid model
The other point Rees Phillips makes is that: "the online agents' commercial interest is not to sell properties, but just to list them, and in that circumstance, it is easy to imagine a scenario where conflicts of interest or profits at principal’s expense could occur."
His concern stems from the scenario where a property is listed, and after that there's no incentive for the agent to do work which a traditional agent may do, such as; "following up on inquiries, consulting existing potential purchasers about new properties for sale and so on. It has to be the case that this would have a marked effect on the conversion metric from listing to sale when compared to a traditional estate agent."
Eddie Holmes, Chairman of the UK PropTech Association (UKPA) – for whom the report was prepared – said Rees Phillips' opinions raised pertinent questions that those operating hybrid models should bear in mind.
“It is extremely important that founders operating new business models, enabled by technology, bear in mind the legislative environment in which they operate. The world of PropTech is no different to any other in this regard," Holmes stated.
The founder of hybrid real estate agency eMoov, Russell Quirk, who is a UKPA member, said Phillips' opinions and queries were essential to those working in the online realty environment.
“We urge those businesses operating in this space to consider these questions as a matter of priority and communicate what steps they take to protect their customers – something which should, ultimately, help those businesses create competitive advantage for themselves,” Quirk said.
“The hybrid estate agency model certainly takes a different approach to that of the traditional agent and it is one that is far better value to the average seller. A traditional agent will charge an average of 1.3% plus vat on a typical £317,000 home sale, which works out to £4,945.20. Our fees are therefore more than five times lower.
“The reason for the disparity is that the traditional agent charges the seller for all of the work done on the 3 in 10 listings that do not sell. That doesn't seem fair to me as it penalises those consumers."
Quirk continued to say that not all online agencies are the same and that his model takes care to ensure that the customer is dealt with in a fair manner.
“eMoov operates a unique model that is a blend of great technology and great people, the latter which deals with the really sensitive parts of a transaction such as valuation, offer negotiation, buyer qualification and sales progression. Some online competitors have resorted to automation and anonymous text messaging for these important aspects.
“Vitally eMoov employ all of their staff on a full time basis whereas a number of our rivals rely upon using self-employed contractors that may perhaps be, say, driving a taxi one day, then listing homes the next. Employing our own team properly, means that our training, culture and compliance are not compromised.
“We are grateful to the UKPA for highlighting issues which go to the core of our own belief in providing the best service we possibly can to our customers.”