No Conditioning
One reason why estate agents have such a bad reputation is because many
adopt a process called conditioning. Conditioning has become part of the
real estate market because many agents over value properties to get customers/vendors
on their books.
The Process
- When valuing a property some agents will quote a price higher than
the property’s true value. This will lure vendors to list with
them, in the belief that the estate agent will get them this higher
price.
- A typical real estate agent’s selling agreement will tie the
vendor to that agent for 3-4 months. If the property is sold during
this period the agent will earn commission whatever the final sale price.
- Having tied the vendor into an agreement, by over valuing the property
the agent knows that they must now convince the vendor to accept a lower
price for a sale to occur.
- The agent will ensure that plenty of “buyers” come to
view the property. Vendors often see these viewings and open inspections
as the agents earning their commission. Many of these buyers will have
budgets lower than the asking price, some “buyers” may even
friends of the agent and have no intention of buying.
- The agent will point out all the negative aspects of the home, and
will talk of the market not being as strong as it was. The agents will
use the evidence of the buyers with the low budgets to suggest a weak
market, they will suggest that the property is over priced in the eyes
of the buyers and that the vendor should drop their price.
- If the vendor elects to sell via auction, the conditioning pressures
are massively increased on auction day. If the bidding stalls below
the reserve price the agent may encourage the vendor to declare the
property “on the market” in the hope that new bidders will
enter the auction thus driving the bidding up. It is not clear why a
bidder would choose to remain silent until the property is declared
on the market. What is clear however is that by declaring the property
on the market the 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 take advantage of this
and treat vendors appallingly. Unfortunately the vendor has no option
but to stay with that agent until the selling agreement expires. A buyer
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. Unless they sign
a ‘sole agency agreement’.
- 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 high 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 and not sell. Buyers are
aware that the property has been around for a while and will wonder what
is wrong with it. The property will have earned the reputation of being
a lemon. The vendors may need to accept a price lower than the value quoted
originally by the agent and lower than the property’s true value
in order to make a sale.
Commission does not guarantee agents will work to achieve best price
Many real estate agents will claim that the commission system means that
the agent’s goal and the vendor’s goal are the same. 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 is 3%. The agent who works hard to
achieve an extra $10,000 for the vendor will earn only an extra $300 commission.
This is an incentive for the agent. However, pushing the buyer for a higher
price may lose the sale. No sale means no commission for the agent.
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 the extra $10,000 is well worth the effort! The rate of
return that the vendor receives for this effort is even more apparent
when we consider that the extra $10,000 as an increase on equity, rather
than as an increase on the value of the property. 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 has reduced your investment
return by 20% would be seen as unacceptable. However, many real estate
agents are able to get away with this kind of activity.
How to avoid being conditioned
Get your property valued by a professional valuer. 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.
By choosing to sell your home privately you avoid the stress of conditioning.
I
don't want to be conditioned ... sign me up!
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