| We all have done it at one time or another. | | | | This decision of America's highest Court has |
| | | | now crossed the border with Canada and has |
| When short of listings, the Realtor goes out | | | | spilled into Real Estate. A case involving a |
| and 'buys' one. The process of buying a | | | | Seller, a Buyer and a Real Estate Agent |
| listing is as old as Real Estate itself. The | | | | acting in a position of dual agency is now |
| agent shows up at someone's doorsteps and | | | | pending in front of the Supreme Court of |
| inflates the value of the property by more | | | | Ontario. The Agent first grossly overvalued |
| than $30,000, $40,000 or even $50,000 over | | | | the subject property at the time he took the |
| and above the actual market value. I know of | | | | listing, then actually found a Purchaser |
| agents who have actually listed properties | | | | ready, willing and able to buy at a price |
| for $200,000 more than what those properties | | | | close the grossly inflated asking price. As |
| were in fact worth. The owner happily signs | | | | the transaction was being financed through an |
| the listing agreement with those dollar signs | | | | institutional lender, the underlying case |
| sparking right in the eyes, and the Realtor | | | | initially also involved an appraisal firm, |
| happily sticks up a sign right in the front | | | | which subsequently has settled out of Court |
| lawn. Of course the house subsequently does | | | | with the disgruntled Purchaser. |
| not sell because it is overpriced, but it | | | | |
| doesn't really matter. | | | | The decision of the Supreme Court will have |
| | | | an enormous impact on how real estate is |
| Or does it? | | | | practiced in Ontario and possibly throughout |
| | | | the whole country, and it will be interesting |
| All the way back in 1988, in a legal case | | | | to see what the outcome will be. The Buyer |
| entitled Basic Inc. v. Levinson, the United | | | | bases his case on the Efficient Market |
| States Supreme Court endorsed a theory known | | | | Hypothesis arguing that he reached the |
| as 'fraud on the market', which in turn | | | | decision to purchase on the integrity of the |
| relies on another theory known in Economics | | | | asking price and claims, furthermore, that |
| as the Efficient Market Hypothesis. The | | | | the dual Agent knew or should have know that |
| Efficient Market Hypothesis postulates that | | | | the asking price was grossly over and above |
| prices of traded assets like stocks, bonds, | | | | the market value of the subject property. The |
| or real property, already reflect all known | | | | Buyer is claiming damages both as against the |
| information and therefore are unbiased in the | | | | Agent and the Seller. |
| sense that they reflect the collective | | | | |
| beliefs of all investors about the value of | | | | The line of defence is that the true |
| the underlying asset and enable investors, | | | | meaningful value of an interest in land is |
| therefore, to assess future prospects. | | | | given by its 'objective value', defined as |
| | | | the price that the property will fetch in an |
| In essence the Efficient Market Hypothesis, | | | | open and fair market, given sufficient time |
| which was developed in the 1950's and 1960's, | | | | to find a Purchaser, the amount of |
| states that subject to certain conditions the | | | | advertising involved in the marketing of the |
| market price of a traded asset fully and | | | | property, the relationship between the |
| accurately reflects all the available | | | | parties and the terms of financing. The |
| information relevant to its value. Under this | | | | additional argument of the defence is that |
| Hypothesis, in an efficient market the only | | | | the truthfulness of the Efficient Market |
| reason as to why a price changes is that new | | | | Hypothesis is actually being disputed by |
| information comes to light. | | | | Economists even in its original field of |
| | | | application: the Stock Market. More |
| Because market prices reflect all available | | | | specifically, the defence argues that even |
| information about an asset, reasoned the | | | | highly developed financial markets such as |
| Supreme Court, misleading statements as to | | | | the New York Stock Exchange are not efficient |
| the integrity of price will affect and | | | | enough to allow Courts to calculate the |
| negatively impact the decision-making process | | | | financial damages caused by fraud, and that |
| of investors, who rely on those statements as | | | | estimates of damages based on the Hypothesis |
| the primary guide to finalize a purchase. | | | | will be necessarily overstated. |
| Which is tantamount to 'intentional deceit', | | | | |
| more vulgarly known as ... fraud. | | | | The Realtor in particular contends, |
| | | | furthermore, that at no time the thought of |
| That ruling has proven a goldmine for | | | | earning a double commission ever crossed his |
| American trial lawyers, who have won fortunes | | | | innocent mind (he was walking the dog one day |
| by suing firms for damages when new financial | | | | and ...). |
| information, often in practice a restatement | | | | |
| of their balance sheets, is followed by a | | | | All of which goes to prove once again the |
| sharp fall in stock prices of the same firms. | | | | point I have been making for years - that is |
| The fall is treated as proof of overvaluation | | | | sellers, buyers, realtors, lawyers and judges |
| due to the initial, wrong statements. | | | | invariably make an explosive mix. |
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