Real Estate Agency Theory

Agency theory looks at the conflicts of interest that exist between parties with different interest in the same asset. Usually this refers to the conflict between shareholders and managers of companies.

Real Estate Agency Theory (which is a term I made up over the weekend), refers to the conflict a real estate agent is in when looking after the interests of the seller or lessor, the buyer or lessee and themselves. The incentives at play in the agents mind are studied in Freakonomics (a great read, buy it here if you are Australian or here if you are South African)

As a buyer / lessee, you would do well to remember that your interest will probably always be last on the list. The problem with this sort of attitude from agents is that in any property transaction - you actually need a buyer / lessee. We are kind of a big deal in the transaction, it does not happen without us. In fact, if you thought about it, the only expendable party in the transaction is actually the real estate agent.

But in the property boom we have just been coming through, demand outstripped supply and the buyer / lessee group was huge. Agents and sellers had all the power, incompetent agents and agencies could make buckets of money without providing good service to all parties.

In order to be a successful agent in a downturn economy, you need to focus on all parties. This secures repeat business, this enhances your brand. All real estate agents sell exactly the same thing, surely the differentiation is who the are and how they sell.

Case in point (with thanks to my wife for coming up with this gem) : We submitted an application to a real estate agent for a rental property we are interested in. They get a whole bunch of applications, they process them and the owner picks a winner. The winning application gets a phone call, to say : "Your application is successful." Everyone else gets....nothing.

What? Not even a phone call. In a shrinking property market! In a fiercely competitive line of work! A real estate agent has :

1. A number of properties they are trying to let
2. A list of contacts that are actively looking (they even know what type of property these contacts are looking for)

A couple of calls and you could rip through your rental property inventory pretty quickly, with very little effort - they might not even have to advertise certain properties.

But I suppose this may not work - like I said at the very beginning - it's just a theory.