Conditioning in the real estate market

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.