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