Real estate scams - conditioning
The conditioning process adopted by some agents is one reason
for the bad reputation that real estate agents have in
Australia. Conditioning has become part of the real estate
market because many agents lie to property owners about the
value of their property.
The Process
When valuing a property some real estate agents will quote a
value in excess of the property's true value in the belief that
the owners will list their property with the agent that gives
them the highest valuation.
A typical Australian real estate agent's selling agreement will
tie the property owner to that agent for 90-120 days. If the
property is sold during this period the agent will earn their
commission whatever the sale price.
Having secured the listing by over quoting the property's value
the agent knows that they must get the owner to accept a lower
price for a sale to occur.
The conditioning process begins. The agent will ensure that
plenty of "buyers" come to view the property; this activity is
often interpreted by property owners as the agents earning their
commission. However many of these buyers will have budgets below
the asking price of the property, some may not even be buyers at
all but friends of the agent!
The agent will start pointing out all the negative aspects of
the home, talk of the market not being as strong as it was and
giving feedback that the market feels that the property is over
priced.
If the property owner elects to sell via auction the
conditioning pressures are massively increased on auction day.
Often the owner will be pressured into putting the property "on
the market" despite the bidding being below the reserve price
previously advised. Agents will claim that by putting the
property on the market interested parties will raise their bids
or even start bidding if they have not previously shown any
interest. The logic for this argument is difficult to follow but
one thing is certain, by putting the property on the market the
real estate agent will get their commission
It is far easier for a real estate agent to persuade a vendor to
accept a lower price than to extract a higher price from a
buyer. The agent only has one party to focus on in the vendor
but may have many buyers to try and convince. Through the
listing agreement the vendor is tied to the real estate agent.
Agents can treat vendors appallingly and the vendor has no
option but to stay with that agent until the selling agreement
expires. A buyer on the other hand can walk away at anytime.
The agent is typically entitled to their commission if the
property is sold during the period of the sales agreement even
if they have never met the purchaser. If the owner finds a buyer
through their personal network the agent will still get their
commission.
Unfortunately many agents who should be working for the vendor
are in fact working for themselves.
Conditioning damages the value of your property
The conditioning process is not just stressful but can damage
the value of your property.
Initially many vendors are reluctant to lower their asking price
from the valuation that the agent provided to secure the
listing. If after a period of time the property has not sold the
owner may agree to lower the asking price.
But by now the property will have become stale. Buyers will know
that the property has been around for a while without selling
and will wonder what might be wrong. The property will have
earned the reputation of being a lemon and the vendors may need
to accept a price lower than the property's true value in order
to make a sale.
Commission does not guarantee agents will work to achieve higher
prices
Many real estate agents will claim that the commission system
means that the agent's goal and the vendor's goal are aligned as
a higher sale price results in more commission for the agent.
Simple mathematics and common sense show that this is often not
the case.
Assuming a typical commission rate of 3% an agent who works hard
to achieve and extra $10,000 for the vendor will earn an extra
$300 commission. Yes this is an incentive for the agent to get a
higher price but there is a risk that by pushing for the higher
price they may lose the sale altogether and no sale means no
commission.
It is better for the agent to sell the property at a lower price
and move on to the next property than to invest the time in
trying to achieve a higher price for the vendor.
For the vendor however the extra $10,000 is well worth the
effort! The rate of return that the vendor receives for this
extra effort is even more apparent when we consider the amount
as an increase on equity rather than as an increase on the value
of the property. Given that many homeowners do not own their
home outright but with the assistance of a mortgage the
repayment of the mortgage will reduce their proceeds from the
sale.
For example a couple may be looking to sell their $300,000
property on which they owe $250,000 to their mortgage company.
The equity that the couple have in the property is $50,000. If
the property is sold for $10,000 less than it's true value the
couple's equity has been reduced by 20%.
Poor performance from a financial adviser that reduced your
investment return by 20% would be seen as unacceptable, but all
too often real estate agents are able to get away with this kind
of activity.
How to avoid being conditioned
By choosing to sell your home privately and having your property
valued by a professional valuer you avoid the stress of
conditioning.
Professional valuers have no incentive to inflate the value of
your property as they earn an agreed fee irrespective of the
valuation that they place on the property.