Monday, August 22, 2005

Real estate scam?

A billboard in Madison (on Regent St.) for a real estate agency promises something along the lines of "we'll buy your home if we don't sell it, guaranteed."* To which I can say, yes, I'll buy your home too: for $1. The website offers more details, revealing it to be slightly less of a scam than I had thought: they give you an offer, and if, within 120 days they haven't sold it for (presumably) more than the offer, they buy it.

In some respects this is a totally meaningless guarantee. Think about it from their perspective. If they are totally honest and work as hard to sell the house when you own it as when they own it, then what happens if they can't sell it above the guaranteed price when you own it? Well, they are buying it at above market rate. Either they sell it at the market rate and eat the loss, or they hold onto it until the market price has gone up. This would require lots of capital they probably don't have. They'll have to give you an offer below market rate to avoid being stuck with having to buy housing. Thus, meaningless. (Also, 120 days is really a tremendously long time to have your house on the market: very few people have that kind of patience).

But it may well be rather sketchy. For this buying option totally screws up their incentives to work hard to sell your house. They can give you an offer a little bit below market rate, and then not work at all hard to sell the house, in fact, they could actively work to prevent it. Then they buy your house at that below market rate and quickly flip it at the market rate -- turning a pretty profit.

Two things may mitigate against this being a scam: first, if the rental market is really strong this could make holding onto lots of housing and renting it make sense (reducing the capital intensity of the guarantee); second, if being a realtor sufficiently reduces transaction costs so that they can buy a bit above the market rate and sell at the market rate and still make money because they don't have to pay realtor's fees and, in fact, get payed realtor's fees when they buy the house first time. A numerical example would make this clearer, but I'm too lazy.

But I think what the existence of this guarantee indicates, really, is a certain softness in the real estate market: people are sufficiently concerned about getting a decent offer that a guarantee is appealing, because, well, a guarentee removes that uncertainty. That is, if the existence of the guarantee actually implies that people are taking them up on the offer....

*Perhaps I'll check exact wording tomorrow...[Update:"I'll sell your home, or I'll buy it, guaranteed!" is closer].

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