In most countries real estate agents are not thought of as the most honorable bunch of guys. That’s true for Bali too. I am one, so I know. A lot of people openly dislike realtors. In the United States only 25% of the population think that real estate agents are honest and of high ethical standards. Only car sales people, lawyers and members of congress get a worse rating (source: Gallup, 2018)!

Why is that so? Ask around and you will get answers like, “I (or my friend) had a bad experience” and “a realtor doesn’t require much skills”, or a combination of both arguments.

What kind of bad experience? “Well, the realtor promised to sell my property at a higher price – just so he could get the listing – but then brought buyers with offers way below that asking price.” Or “the realtor didn’t disclose all the costs associated with the sale. He wasn’t upfront about taxes and how to remit payments to my offshore account and the associated withholding tax of 20%, which killed the deal at the end”. And so on and so on.

What’s at the root of this distrust towards realtors? 

It lies in various conflicts of interest in the agent-principal relationship. Let me explain. In Bali, the realtor is typically paid by the seller, i.e., the seller is the principal and the realtor is his fiduciary or agent. A fiduciary is a person with a duty to preserve the good faith and trust a principal has invested in him or her. This is formalized in the listing agreement, which defines that the agent is acting in the interest of the seller to sell the property at the best possible price against a commission of the sale price. Since the agent earns more money if he or she sells the property at a higher price, one assumes that the interests of principal and agent are aligned. But that’s not necessarily the case.

The first conflict of interest arises when the agent pitches his services to the seller. In order to get the listing, he may inflate the price that he “promises” the seller. That’s almost always the case in Bali. Agents offer unrealistic prices to compete for listings with other agents. And since there is no reliable database about true prices of property transactions in Bali, most sellers are in the dark about what constitutes fair market value for their property and therefore wishful thinking takes over: the sky becomes the limit, not the market! And after a few months and desperate calls from the seller, the agent drops the bomb and pushes for a substantial price drop as he can’t find buyers at the asking price. 

The second conflict of interest happens because most listings in Bali are multiple listings. Since the seller is typically wary of the agent, he hedges his bets by appointing several agents at the same time. This reduces the motivation of the individual agent to wait for the best possible price. Once he gets a reasonable offer at hand, he will push to get it accepted, even if he knows that a better offer is possible. Why? Because he is worried that another agent may sell the property before he will.

And what about the buyer?

Should the buyer trust the realtor? After all, the seller is paying the agent and the higher the price the agent can sell for, the more he earns. Clearly, the agent is not the fiduciary of the buyer in this scenario, although he may claim to represent the best interests of the buyer.

What can our poor agent do in such a situation? On one hand, he is supposed to maximize the price for the seller (and for his own pockets), on the other hand he needs to credibly demonstrate to the buyer that the price he proposes is the lowest possible price for that property. He has to make both parties happy at the same time. That’s what we call doing the splits! Ouch!

To be successful, realtors need to be true acrobats, walking a tight rope and always on a balancing act. Who says that not much skills are required to do this job? Isn’t it extremely skillful to please both sides? After all, the best training for a realtor may well be a course in psychology, not law.

Having said all this, what’s the way out?

Read my next contribution and find out.

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