The standard principal-agent model usually
involves two principals in real world situations. I can’t think of such a
situation in which I was involved, but I know that my mother encounters this
daily, since she works as a real estate agent. Because of the way the real
estate market works, sometimes there may be two agents involved (one for the buyer
and one for the seller). However, most deals involve only one agent meaning she
is usually the agent for both the buyer and seller. Since I don’t know any particular
case regarding this, I will instead talk about how real estate agents generally
operate.
Real estate markets function in a very
similar way to what is described in the Excel homework on Bargaining. There is
a seller and buyer who are looking for the best outcome in their favour (seller
looks for higher price, buyer looks for lower price). However, who the outcome will
favour depends significantly on the agent. Consider an example where an agent decides
to work in favour of the seller and the seller wants at least x dollars and the
buyer is looking for a price under y dollars (the agent usually has an idea of
the max/min price for a seller or buyer unless they intentionally lie about it
to gain an advantage). The agent will then try and convince the buyer that the
seller wants more than x dollars (even though it isn’t true) to convince the
buyer that they will need to raise their offer. This relates to the Excel
homework on bargaining where we realized that the agent can affect the deal based on who he
favours, by claiming that the seller valuates the product more than they
actually did or by claiming a lower valuation by the buyer than the actual valuation.
Usually the agent will work in favour of
the seller because of two reasons: Firstly, they usually have first contact
with the seller who is trying to sell their property (and then try and find
suitable buyers). Secondly and more importantly, their income from the deal is a
percentage of the value of the deal so they earn more if the property is sold
for more. An agent will usually only work in favour of the buyer if there is an
incentive, for example personally knowing the buyer, a high possibility of being in future deals with
the buyer, or even if the buyer offers the agent a financial incentive to lower
the price. Therefore, what is considered as a good performance by both parties
are completely different. For the seller it is selling their property for
higher than their valuation and for the buyer it is buying it for lower than
their valuation.
Let me note that some of the issues you are talking about depend on market "thickness" and whether there are very similar properties in the neighborhood that have been sold recently or not. This matters first in that when there is going to be a mortgage obtained by the buyer to pay the bulk of the purchase price, then the lending institution will have the property appraised. The appraisal process will fix the house value if there have been lots of similar properties sold recently. In this case there really isn't that much room for price to be out of line.
ReplyDeleteIf the place is unique, however, or is somewhat outside of a heavily populated area so there aren't that many comparable properties, then there is more room for the transaction price to be determined as in the bargaining homework. And additional factor that comes to play here is how long the property has already been on the market before the buyer makes the offer. If that is close to when the the seller listed the property, the buyer might not have much bargaining power. If the house has been on the market for quite a while, the buyer has a stronger position.
I have actually never heard of an agent acting for both the buyer and the seller. But there are definitely cases where only one of them has an agent and in some cases neither has an agent, so they can avoid the fees.
If the agent really worked for both of them, it might be more to the agent's interest to have them come to a deal quickly, rather than favor one or the other regarding the price. A lengthly negotiation that the agent participates in can be a painful experience, as ti prevents taking on other clients.
The point you mentioned about the appraisal process to assess a property's value is something I did not consider, so maybe in such cases, the chance is much smaller of getting a price higher than the property's value. Regarding who an agent acts for, there are definitely cases where there is no agent involved in a deal, but there are actually also many cases in which an agent acts for both the buyer and seller, but the most common one is that when the agent finds out that a seller is trying to sell their property, they tell the seller that they will help them out by advertising the property and finding suitable buyers. Since potential buyers directly contact the agent (or the real estate agency where the agent works), the agent works for the buyer as well. That being said, this may not be as common in the US since my knowledge on how the real estate agents work is not based on the US market/system.
DeleteOne thing I forgot to consider is that a real estate agent usually tries to sell a property quickly so that they earn their commission and can move on to closing other deals and therefore. I actually first came across this when reading a book called 'Freakonomics' by Stephen Dubner and Steven Levitt, in which the authors explain that an agent won't always have their clients' best interest at heart.
I think based on this, what I said in my original post might not make complete logical sense, but even if we look at real estate agents from the point of view that they want to reach a deal quickly, it means that they will favour the buyer. This is because the agent will not try and encourage the buyer to raise their price but rather encourage the seller to lower their asking price. After speaking to my mother, she said that the seller is more likely to budge with prices since they are aware of the lack of buyers. I think this actually is based on how the economy is doing at the time. My mother is a real estate agent in Dubai, where the economy has slowed down considerably in recent years due to a downturn in its real estate market. Therefore there is low demand in the real estate market which is why it is currently easier to convince sellers to lower their asking price.