Myth of the Real Deal!

Information in Indian Real Estate: Invaluable, Indispensable & Infallible

Know and thy will be liberated.

A Breakthrough paper by Steven D. Levitt & Chad Syverson delves into the information as a value and enables us to understand how Real Estate works. Some observations from the research paper “MARKET DISTORTIONS WHEN AGENTS ARE BETTER INFORMED: THE VALUE OF INFORMATION IN REAL ESTATE” have been explained below.

‘Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real-estate agents, who know much more about the housing market than the typical homeowner, are one example. Because real estate agents receive only a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly. The agent has strong incentives to sell a house quickly, even at a substantially lower price, and thus may encourage clients to accept sub-optimally low offers too quickly.

A defining characteristic of transactions involving the hiring of an expert is the

informational advantage enjoyed by the expert relative to the client seeking advice. As a result of this private information, expert agents may mislead their clients by exaggerating the costs or difficulty of a solution, providing unneeded services, or otherwise distorting the information to maximize the expert’s own payoff.

Thus, the primary predictions of the theory are that (1) for two identical houses, one owned by a real estate agent and the other owned by a client of the real estate agent, the real estate agent’s home will stay on the market for a longer period of time and sell for a higher price, and (2) the greater the informational advantage of the real estate agent, the larger these two differences will be.

Experts hold valuable information. This information is helpful to those who hire them,
but can also be a source of welfare-reducing distortions. In this paper, we examine economic interactions between experts and their clients in a particular industry, residential real estate. The greater informational advantage the agent enjoys, the larger the difference between the price and time on the market experience of agents and the clients they represent. The combination of real estate agents’ information advantage along with the commission form of the typical real estate contract combine to create distortions from first best. Homeowners are induced by their agents to sell too quickly and at a price that is too low.’

Isn’t it surprising that even with the coming of the Information Age and Technology, Real Estate transactions remain in the uncharted turf of a few. May be the incentives given to the expert are too few or the information is incomprehensible. Especially in India where Buyers and Sellers would want to outdo their expert advisers and expert realtors are always looking to chip in the extra bit by not disclosing the true value of the information. The quality of Information at the hands of an Indian realtor is more often than not speculative rather than informative. But whatever it is, the end user or the buyer neither gains nor looses. Because if he’s made to wait and pay more, he stands to loose. But whatever it is the importance of information dissemination on both the ends is critical for the evolution and growth of this business.