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The ugly side to sole mandates

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Borrowed from Lea Jacobs :

In a recent article we noted that sellers who chose to market their properties under a sole mandate agreement could be better off than those who chose to use multiple agents to sell their homes.

It looks like we may have been wrong, and although the sole mandate route, when utilised correctly, may well be the way to go there are agents who are abusing the system.

“The practise of estate agents ‘buying’ sole mandates – which last reared its ugly head before the 2009 recession – is becoming prevalent again and causing market distortion in many parts of the country as well as significant financial losses for property sellers,” says Jan Davel, MD of the RealNet estate agency group. He explains that ‘buying’ a mandate is the practise of deliberately inflating the estimated selling price of a property in order to get the seller to award a sole mandate.

“This is happening again all over SA,” he says, “and what’s worse is that the biggest offenders are usually not inexperienced newcomers to the industry as one might expect, but well-seasoned agents in the employ of some of the biggest-name companies in the real estate industry.”

Rob Allen, principal of the RealNet franchise in Randburg, points out that sellers should be under no illusion that agents who overvalue their properties in order to secure their sole mandate will not cause them financial harm.

“We believe that securing mandates on this basis is thus tantamount to defrauding sellers. It is also causing sellers to lose confidence in agents in general and is doing damage to the real estate industry as a whole,” he says.

So why would an agent deliberately overprice a home to secure a sole mandate, knowing full well that there is little or no change of the property selling at that price, and how can sellers avoid these unethical individuals?

Ask any agent and they will tell you that in real estate speak, ‘he who has the most stock controls the market’. This makes perfect sense when you think like a buyer. An agency that can show that they have large numbers of property on their books exclusively is bound to impress. In the buyer’s mind, this indicates that the agency is highly successful in a particular area.

It needs to be made patently clear that sole mandates are an excellent selling tool – when used correctly. The problem, it now seems, is to identify which agents actually want to sell the home and which merely want to look good on paper.

As with any property valuation, it is highly advisable to get at least three comprehensive comparative market analysis (CMA) reports before putting the home on the market. These reports indicate how the agent has reached a selling figure by providing concrete evidence of (among other things) what has been sold in the area within a certain time period. It should also show what similar properties are currently for sale, and at what price.

Serious sellers who are intent on selling their homes in the shortest possible time need to heed these reports and price their properties accordingly. If presented with a much higher selling price, the seller needs to ask the agent to provide reasons and documented evidence as to how he has arrived at the higher valuation.

Sadly, as humans we are easily tempted, and having one agent validate our own ideas that the property is worth far more than others are saying it is often clinches the deal. The sole mandate is signed and…nothing – or very little – happens thereafter.

“It is a long-established fact that potential buyers will quickly lose interest in a property which is overpriced,” says Allen. It will then languish on the market until the seller, who was misguided by his agent’s original overvaluation, decides either to withdraw it or to drop the price significantly – and quite possibly below what he would have sold it for had it been priced correctly in the first place.

“Properties in our area that are correctly priced will now sell within four to six weeks,” says Allen. “However, if a property with a bond of R800 000, say, lingers on the market for an extra six months because the asking price is too high, it will cost the seller almost R42 000 in additional bond repayments that could have been spent on transfer costs, or repaying the bond on a new property.”

The problem is not exclusive to the larger centres in South Africa and many areas that attract large numbers of holidaymakers over the festive period are reporting the same unfortunate trend.

John Knight, co-principal of the RealNet franchise servicing the coveted holiday home destinations of Pringle Bay, Betty’s Bay and Kleinmond, says the practise of buying mandates is rife in these areas at the moment as rogue agents seek to “tie up stock and close everyone else out of the market during our busiest time of the year.”

Sellers, do your homework and deal with agents who can back up what they are saying with cold hard facts. Don’t, and you could end up sitting with a property that no one wants to buy, simply because the price isn’t right.

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