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