Inefficient Markets, Part II–Why Net Pricing Is A Dirty Word
Net pricing. In my vernacular, it’s a dirty word.
It’s also, unfortunately, common with real estate listings around the world…especially in inefficient markets like those in Latin America.
Exclusive listings are rare, because sellers think that listing with every agent they can find will improve their chances of selling. Because listings aren’t shared and because, in these markets, there’s no such thing as a multiple listing service, it’s easy for each agent who takes the listing to offer the property for whatever price he wants.
Here’s how it can work: The seller tells an agent he wants US$100,000 for his piece of property. The agent can then list the property for US$150,000, say, even though the standard commission in that market might be 7% or 8% or 10%–certainly not 33%.
Net pricing is one reason why, in many markets, you’ll see the same piece of property listed for sale with different agencies for different prices.
I received today, for example, a listing for a piece of property I’m putting a deal together to purchase in Belize. This listing is from an agent other than the one I’ve been working with. His price is 12% higher than the list price with my agent…which already includes, I’ve confirmed, my agent’s commission.
Here’s another example of how net pricing can work:
A seller tells his cousin that he wants to sell his property for US$50,000. The cousin tells his neighbor that the property is available and adds US$5,000 to the price as commission for himself. The neighbor tells his brother and adds US$10,000 for himself. Then the brother of the neighbor goes to a real estate agent, offering to place the property for sale with that agent and adding another US$15,000 to the price as his take.
Now, as far as the agent is concerned, the price of the property is US$80,000. He adds US$20,000 for his own commission and begins promoting the listing.
This example is most common with raw land in the countryside, where the owner may not even know that the real estate agent listing his land exists.
With no multiple listing service, no agency cooperation, and typically no decent sales records, foreign real estate markets are studies in inefficiency. You can do your research to try to determine current prices and values, but your best defense against being the victim of net pricing is to deal direct with the seller to negotiate price. That won’t eliminate the risk of being stung by net pricing, but it will reduce it.
Of course, negotiating direct with the seller introduces another risk factor: gringo pricing. It is commonly believed among the general population of Central America that all gringos are rich and therefore can afford to pay more for any piece of property than a local. When they see the color of your skin or hear the accent in your Spanish, they hike up the price.
In some parts of the world, land prices can be so low that even the gringo price will seem cheap to you. One colleague of mine moved to a new country several years ago and began dabbling in local real estate. The first year, he knew he was getting only gringo pricing so he didn’t buy anything but kept researching and scouting.
The second year he thought he had penetrated to local level pricing…because he was being quoted prices 20% lower than the year before (this though the market had appreciated nicely overall in the intervening months). He bought a few pieces of land and kept looking for more good deals.
In year three, my colleague engaged a local scout…who was quoted prices a further 20% below prices from year one (again even though the market had continued to move up overall).
In retrospect, my colleague now sees that it wasn’t until year four that he in fact gained access to true local level pricing.
This is not say that he didn’t make good investments in his first couple of years of buying. Those buys have appreciated in value, but the best deals were made in year four and beyond.