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