Enter the complicated world of brokery


The Dangers Of Overvaluing Real Estate

We all have done it at one time orThis decision of America's highest Court
another.has now crossed the border with Canada
When short of listings, the Realtor goesand has spilled into Real Estate. A case
out and 'buys' one. The process ofinvolving a Seller, a Buyer and a Real
buying a listing is as old as RealEstate Agent acting in a position of
Estate itself. The agent shows up atdual agency is now pending in front of
someone's doorsteps and inflates thethe Supreme Court of Ontario. The Agent
value of the property by more thanfirst grossly overvalued the subject
$30,000, $40,000 or even $50,000 overproperty at the time he took the
and above the actual market value. Ilisting, then actually found a Purchaser
know of agents who have actually listedready, willing and able to buy at a
properties for $200,000 more than whatprice close the grossly inflated asking
those properties were in fact worth. Theprice. As the transaction was being
owner happily signs the listingfinanced through an institutional
agreement with those dollar signslender, the underlying case initially
sparking right in the eyes, and thealso involved an appraisal firm, which
Realtor happily sticks up a sign rightsubsequently has settled out of Court
in the front lawn. Of course the housewith the disgruntled Purchaser.
subsequently does not sell because it isThe decision of the Supreme Court will
overpriced, but it doesn't reallyhave 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 legaland 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 endorsedcase 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 theorypurchase on the integrity of the asking
known in Economics as the Efficientprice and claims, furthermore, that the
Market Hypothesis. The Efficient Marketdual Agent knew or should have know that
Hypothesis postulates that prices ofthe asking price was grossly over and
traded assets like stocks, bonds, orabove the market value of the subject
real property, already reflect all knownproperty. The Buyer is claiming damages
information and therefore are unbiasedboth as against the Agent and the
in the sense that they reflect theSeller.
collective beliefs of all investorsThe line of defence is that the true
about the value of the underlying assetmeaningful value of an interest in land
and enable investors, therefore, tois given by its 'objective value',
assess future prospects.defined as the price that the property
In essence the Efficient Marketwill fetch in an open and fair market,
Hypothesis, which was developed in thegiven sufficient time to find a
1950's and 1960's, states that subjectPurchaser, the amount of advertising
to certain conditions the market priceinvolved in the marketing of the
of a traded asset fully and accuratelyproperty, the relationship between the
reflects all the available informationparties and the terms of financing. The
relevant to its value. Under thisadditional argument of the defence is
Hypothesis, in an efficient market thethat the truthfulness of the Efficient
only reason as to why a price changes isMarket Hypothesis is actually being
that new information comes to light.disputed by Economists even in its
Because market prices reflect alloriginal field of application: the Stock
available information about an asset,Market. More specifically, the defence
reasoned the Supreme Court, misleadingargues that even highly developed
statements as to the integrity of pricefinancial markets such as the New York
will affect and negatively impact theStock Exchange are not efficient enough
decision-making process of investors,to allow Courts to calculate the
who rely on those statements as thefinancial damages caused by fraud, and
primary guide to finalize a purchase.that estimates of damages based on the
Which is tantamount to 'intentionalHypothesis will be necessarily
deceit', more vulgarly known as ...overstated.
fraud.The Realtor in particular contends,
That ruling has proven a goldmine forfurthermore, that at no time the thought
American trial lawyers, who have wonof earning a double commission ever
fortunes by suing firms for damages whencrossed his innocent mind (he was
new financial information, often inwalking the dog one day and ...).
practice a restatement of their balanceAll of which goes to prove once again
sheets, is followed by a sharp fall inthe point I have been making for years -
stock prices of the same firms. The fallthat is sellers, buyers, realtors,
is treated as proof of overvaluation duelawyers and judges invariably make an
to the initial, wrong statements.explosive mix.



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