Some Conclusions and Recommendations to Address the Market Price Manipulation Strategies Which Affect Real Estate Negotiations

Posted on November 17, 2013 by | 7 Comments
George_Rousos

George Rousos

Author: George Rousos
of Industry Training Consultants

Some of the activities and practices of the real estate industry, that might be questioned in ethical terms are about the potential to distort pricing information in a market in which it is already very difficult to obtain relevant and dependable information.

The pricing information is distorted because some of the conditions associated with the definition of market value have been manipulated, particularly the concept of the arm’s length transaction and the assumption that the parties, especially the purchaser, are knowledgeable.

The property industry cannot continue to ignore unethical or marginally ethical behaviour and successfully compete with other investment media. It cannot continue to seek refuge behind the mantra of caveat emptor. Unethical behaviour is extremely hard to identify and the legislation that does exist is poorly executed. The press are quite keen to highlight stories of poorly treated vendor/purchasers particularly in the unsophisticated residential investment market populated by small “mum and dad” investors armed with the latest from a “how to get real estate rich” seminar.

What can be done to rectify the problem of inadequate information? One answer would be to record property transaction details in a central easily accessible location.Another answer would be to require that a pre-sale valuation be prepared and included in the sales contract as part of the due diligence process. The alternative view would be to state that buyers should obtain the advice. The due diligence process is costly, particularly so for homebuyers who may inspect several properties and who could not afford the inspection reports and valuations that could protect them. In addition, market prices could be artificially set by the valuation process rather than using legitimate information to substantiate the price.

However, it is still likely that such a reform would gain traction and attention for other reasons. The first concerning the lack of accuracy surrounding “Online Automated Valuation Models” and the common errors found in value from these automatic reports. The other issue pertains to the accuracy and validity of the full bank valuation, which is nearly always less than the true market value. This is because they’re not the same thing as a pre-sale valuation. The bank valuation is used to work out how much the banks can lend responsibly to a borrower and to mitigate risk in the event a borrower defaults on the loan. On the other hand, a pre-sale valuation is more comprehensive and is the price one is expected to get, if they were to sell their property (supply and demand curve shifts are not accounted for). During this process, valuers analyse sales of both vacant land and improved properties, making adjustments for the added value of improvements to both the area and building. When there are unsuitable sales, a valuer will factor in other matters, such as most valuable use of the land, constraints on use such as zoning and heritage restrictions, shape and land features such as slope and soil type. Other evidence may suggest to continue with the proposed legislation relating to agency behaviour in which dummy bidding and the like would be effectively outlawed. The difficulties associated with the identification of dummy bids and the continual regulation of pricing practices would likely be an initiative project doomed to failure.

In the final analysis, the application of ethical principles is required in any activity associated with human interaction and indeed with wider interaction in the natural and man-made environment. A general awareness of the importance of ethical behaviour needs to be instilled in parties involved in real estate transactions. To prevent unethical conduct or poor ethical judgement, processes and tools need to be implemented to ensure effective negotiation takes place. Most importantly, consultation methods, sound legal knowledge and the preparation of all material needed to negotiate effectively with other parties, will be an integral part of the  planning process and critical to achieving success in negotiations.

7 Comments

  • Dean says:

    Nice ideas George/Peter. It would be interesting to see how the ideas would be implemented.

  • State governments need to get their act together and draft a bill for “Pre-Sale Valuations” to be annexed to the contract for sale of land. The latest NOTICE OF VALUATION figures released in Lake Macquarie (as at 01/07/2013) can not be relied on, due to ongoing shifts in demand and supply. Also, land values do not include the value of your home or other structures and improvements on your land, only clearing, filling, draining and retaining walls are included in your land value.

    Reference Source
    http://www.valuergeneral.nsw.gov.au/your_land_value/valuation_methodologies

    • Hi agree with George re pre sale valuations.

      They are irrelevant if the vendor’s price expectation is beyond what they disclose anyway.

      Trust is built on honesty and transparency, both of which are lacking among some agents. Insidious underquoting also continues to bring the real estate profession into disrepute.

      It always amazes me that some agents think they can mislead buyers and then convert those same buyers to clients at some point.

      Amend current legislation to compel property vendors to declare, and estate agents to publish their vendors’ reserve prices at the beginning of an auction marketing campaign, across all advertising and marketing materials (both printed and electronic), and for the duration of the entire campaign and transparency will come to the fore.

      Trust can then be established with buyers as well as vendors.

  • Kevin Turner says:

    If the auction reserve is going to be disclosed at the start of the campaign Miriam, then why call it an auction? Isnt that just private treaty – listing wirh a price?

    • Peter Mericka says:

      In that case Kevin, can any real estate auction really be called an “auction”, given that there is no sale on the fall of the hammer. The auction is really no more than a selection process by which the person with whom the vendor will negotiate a sale is chosen and then invited to make an offer to the vendor after the event. If we’re going to pedantic, let’s abandon the term “auction” entirely when discussing the purchaser selection process.

  • Kevin and Miriam,

    Firstly, there would be no need to set a reserve price if pre-sale valuations were part of the contract for sale of land. As long as the market is aware of the properties true value, they will decide on the eventual sale price and do what is necessary to avoid paying excessively above the market value price.

    As it is, the reserve price should be set and disclosed at least one to two weeks out from the auction. It accomodates for buyers needing to obtain a reliable pre-approval from the bank, calculate the cost of their deposit bonds and most of all hedge house price risk. It would likely breach consumer law if such information was hidden or left out. Furthermore it is information that is relevant to the decision of the other party

    Also, it is unfair and unreasonable not to disclose the reserve price anyway, given there are vendor bids to push up the price and at the same time, the right of the auctioneer to reject any bid that in his opinion is not in the best interest of the vendor.

  • Peter Mericka says:

    The rationale behind an auction is fairly basic. It is supposed to be a situation where the a vendor either has no idea as to what the property is worth (unlikely), or competition for the property is so great that potential purchasers should be given the opportunity to compete to buy it. If the latter is the case, then it stands to reason that the vendor would declare the price at which he/she will not sell, and then allow market forces to operate so as to take the price upward from that point.

    The problem is that real estate agents bring another purpose into the equation. Getting a quick sale with plenty of vendor paid advertising. This purpose works against disclosure of the reserve.

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