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 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.
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