Providing clients with residential conveyancing services has multiple benefits for a firm. It can provide a steady stream of work and cash flow enabling a firm to handle more complex cases, and attracting clients who may want to access other services such as, drafting a will.

Traditionally, it has been regarded as a positive service, with the benefits outweighing the negatives. But this perception may be changing.

Property work can also have negative consequences. There is likely to be increased due diligence checks related to fraud, money laundering and financial crime, immense pressures to complete quickly, and difficulty finding experienced staff.

When it comes to professional indemnity insurance (PII), insurers regard property as high-risk, which can and usually does, impact on premiums. Moreover, as the proportion of property work a firm does increases, fewer insurers are willing to provide cover.

Performing a low volume of property work (less than 5%), meanwhile, may be seen as ‘dabbling’, with a disproportionately negative effect on premiums.

This article is not intended to deter firms from property work, but to encourage them to question if the property work they are doing is producing the expected benefits.

Some firms, taking into account the overall costs, may decide that property work is no longer a sound business decision.

The below examples will help to demonstrate why this could be a challenge.

 

Firm A

Firm A is a regional firm with £1,000,000 in income and approximately 21% of the work is property related. Its annual insurance premiums are £70,000. It has two partners and generates profits of £200,000 per annum before tax.

  • The firm manages on average 12 property matters a month or 144 matters per annum. To manage this work they have an experienced property solicitor, a paralegal and a secretary. The total salary costs between all three are £100,000 plus National Insurance and the cost to employ (system, PCs desks etc etc) – total estimated salary costs, £150,000 per annum.
  • Overall supervision and management by the partners and management of CQS including file reviews and policy management, estimated at £10,000 per annum.
  • PII premium apportioned to property work. This assumes a firm of approx. £1m in income overall and a premium of £70,000, estimated at £35,000.
  • The firm pays approximately £10,000 of referral fees per annum.
  • Average fee for property work is £1500 which generates an annual income of £216,000 (144 matters x £1500).
  • Total income for property is £216,000.
  • Total expenses or property is £205,000.
  • Total profit for property is £11,000.
  • Profit margins for property work is 5.1%.
  • Total income overall is £1m.
  • Total expenses overall are £800k.
  • Total profit overall is £200k.
  • Total profit margin is 20%.

Compare this to Firm B:

Firm B

Firm B is a regional firm with £850,000 in income and 0% of the work is property related. Its annual insurance premiums are £40,000 and for the property work it does generate it has a fee share agreement with another local firm.

  • The firm receives on average five property enquiries a month, or 60 per annum.
  • There are £0 costs for the management of the property work as a secretary arranges for the enquiries to be passed to the other firm.
  • PII premium is reduced to no property work and the insurance regarding the firm is lower risk, estimated at £40,000.
  • The firm earns £12,000 for the fee share arrangement on the 60 cases.
  • The firm does not pay referral fees.
  • Total income for property is £12,000.
  • Total expenses for property is £0.
  • Total profit for property is £12,000.
  • Profit margins for property work is 100%.
  • Total income overall is £862k.
  • Total expenses overall are £560k.
  • Total profit overall is £302k.
  • Profit margin for property work is 35%.

This table helps to illustrate:

 Firm A ─ Profit with property work Firm B ─ Profit without property work

Income

£1m

Income *

 

£862k

 

Expenses

£800k

Expenses **

 

£560k

 

Profit £

£200k

Profit £

 

£302k

 

Profit %

20%

Profit %

 

35%

 

*Income is increased on Firm A as partners do not have supervision time for property work and can focus on other work. Overall income is reduced as the only income for property work is referral fees.

 

**Expenses are reduced as there is a saving of £35k per annum for not handling property work and £0 cost for the department.

 

These figures are for illustration purposes only and it is acknowledged that there may be hidden benefits of property work which are not factored into these numbers. It is also acknowledged that some property fee earners will have a mixed portfolio and therefore a pure model of splitting work is not always appropriate.

Next steps

Property work is an established and necessary service for clients, and a cornerstone service for many firms.

Benefits remain in performing property work and for many firms these benefits outweigh the potential or actual negatives, making it an essential part of a firm’s strategy.

Other firms may consider that property work brings some benefits but, ultimately determine that property work does not result in sufficient financial benefits.

It is important for firms to consider the benefits and drawbacks of property services and take action to consider their cost base, reviewing the efficiency of their team and making improvements to increase profit margins.

If you’re considering adding property to your services, consider carefully if the benefits outweigh the negatives.

If your firm is handling small amounts of property work, alongside other services, consider if it would be better to focus on other lower risk practice areas, and perhaps enter a fee-sharing arrangement with an established property firm to handle those matters for your clients.

Finally, this article should not be regarded as discouragement, it is only meant to highlight the obvious but often unspoken truth, that handling property work can also have serious disadvantages, which firms should give serious thought when deciding their business strategy.

 

David Green is a member of the Law Society’s Professional Indemnity Insurance committee

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