Real estate: a classic information imbalance
It’s often said you can tell when a real estate agent is lying. His lips are moving.
The property market is a pretty classic place where the information imbalance does the consumer a disservice. Real estate agents have all the information, and most buyers have to make do with their best, uninformed guess. The job of an estate agent is to know how much a house is worth given its features and market conditions. They’re probably even pretty good at it, but they have little incentive to give anyone else an accurate appraisal.
One story about estate agents that crops up all the time is the estate agent inflating the price he says he can achieve before signing the marketing contract. Immediately after the contract is signed, they start lowering the vendor’s expectations to get the sale to happen quickly and bank their commission. As explored in Freakonomics, the agent hasn’t got much incentive to get you an extra $10,000 if it’s going to add a week onto the sale process, when of the agent’s 6% commission, the agent himself might only pocket a couple of hundred dollars.
A simple solution to this would be to give the agent a bigger bonus if he gets over the price he told you he’d get before you signed the contract. And a bigger slice of the portion over that price too. Of course in a world where that happened, the agents would be wary of what they promise, but then you could shop around for the agent promising (and willing to sign for) the best, but based on their expertise achievable, price. I reckon you’d have trouble finding an agent willing to sign such a contract.
Another area where the information asymmetry hurts consumers is agents advertising ridiculously low “guide” prices for auctioned properties. I’ve been to auctions where the “guide” price the agent was publishing was lower than the reserve price of the auction! The problem here is that potential buyers have to expend money, in the form of engineers’ and pest reports, bank cheques for deposits, contract reviews and the like. To then turn up to an auction and find you’re not even in the ballpark is incredibly frustrating and annoying.
There are regular calls to crack down on these kinds of practices, which are illegal in some states but very difficult to enforce.
Another approach would be to require estate agents to publish in some public register their estimate of the property’s value. A public database would enable services to offer historical ratings of how close to their estimate an estate agent has been. It could even be displayed next to the advert in online listings. This would give prospective buyers some idea of how bogus the estate agents’ claims have been in the past, and give some incentive to agents to establish a history of honesty.
Can you see any problems with this approach? What do you think could improve the information available to non-professional property buyers?
If the reserve was made public before the auction, that could help a lot. What the property will sell for can genuinely be hard to predict, but the vendor knows beforehand what price they will be willing to sell for. Disclosing this saves everyone a lot of grief.
P.s. in the comment form, it says “E-E-mail (will not be published) (required)” – there’s an extra E on email, don’t know if that’s intentional or not.
Not publicising the reserve price is the advantage of selling by auction, so I doubt you’d get that done. The way auctions work in Australia is by no means the only model going. In Scotland they have “sealed bid auctions” where all bidders submit a bid before a due date and the highest wins, no chance to bid up again. I think Australians get off on the drama of live auctions though.
The E-E-mail thing seems to be due to the INove theme I’m using. I’ve notified the theme author — I quite like the theme.
We sold our house last year and thought that the agent’s original estimate was unrealistically optimistic. Still, he was prepared to put his commission where his mouth was and agreed to a sliding commission scale. If we was right he would have got quite a bit more than the usual commission. If our own estimate was right, we’d get well below market commission. As it turned out, we were right and, while I would have preferred the agent to be right, at least we had the satisfaction of a cheap marketing campaign.