A friend of mine recently moved into a prime neighbourhood in Bangalore. And by her own account, she managed to rent the house at a throwaway price. I can still recall her excited voice from the other end of the line -
- Just ₹25,000 a month, you know! At such a nice location too.
- And everything I need is practically just a walk away!
It took only 3 months for her to start singing a different tune. The rains came, and along with that, so did a whole lot of problems she hadn’t expected. It turns out the house had a leaky roof, the road outside her house was prone to flooding, and the area was prone to a lot of power cuts during the monsoon.
All in all, by the time the rains came and went, she ended up spending more money repairing the damages than her monthly rent. The reason for her trouble? Information asymmetry. In other words, she didn’t know some key information about the house. But the owner did.
If one party in a transaction has more information about the product or service than the other party - that’s information asymmetry. In real estate, more often than not, the owner or the seller knows all the relevant and material information. However, the buyer or the tenant only knows what the owner or seller wants them to know.
For example, the true market value of a house may be just Rs. 40 lakh. But as a buyer, you may not be aware of this, and you may end up buying the house for ₹45 lakh.
Or, you may rent a house at ₹20,000 a month. And after moving in and getting to know the people around you better, you may find that houses similar to yours are being rented for just ₹15,000 a month.
This is a classic information asymmetry example.
The short answer - yes. Information asymmetry prevents you from getting the true picture. And you may pay more for a property than it is truly worth. But that’s not the only issue. Without all the relevant information, you may eventually find yourself with too many problems around the house that need fixing.
The maintenance costs may shoot up. Your home may feel unsafe. And you may even find yourself wanting to sell the place just to stop dealing with the issues. Financially, this is not a good move. Information asymmetry can make the place you call home feel less like it.
The natural solution to lack of information is awareness, of course. And today, with talk of information asymmetry trickling into mainstream media, more buyers are becoming cautious and aware of what they’re purchasing.
Top brands and real estate startups are also working to resolve the imbalance in the information available with their own solutions and tools.
For instance, NoBroker recently released a TVC on information asymmetry. Watch it here. And Square Yards, another real estate platform, has made government registration records public on its website. You can find the records for over 1.4 lakh buildings or projects located in India’s top 11 cities.
Measures like these can help bridge the gap between what the seller knows and what the buyer knows before sealing the deal.
Getting down to the practical side of things, there are four levels of information available in the real estate market. Each level of information has a different degree of accessibility.
This is the information that is available publicly. Fact check: it is very limited.
Unlike in the share market or the bond market, most of the essential details in the real estate market are not available in the public database. Still, you can find some information online. Like the schools available in a neighbourhood, the connectivity of a locality, and the average price of houses in the area.
This is the information that you get when you actually visit the locality where you want to buy or rent a house in. By talking to people who live in the area, you can gather more details about the ups and downs of a house in that neighbourhood. Here is where you’ll find out things that you cannot access online. A locality's safety level, the state of the roads connecting your prospective house to the main road, and the amenities available.
This next level of information is available with mediators and brokers. So, it’s a little hard to get hold of these details. For instance, your broker may know if you are being overcharged for a property. Or if the quality of the interiors in the house is not quite up to the mark. Squeezing these details out of your mediator isn’t very easy. So, as a buyer, you need to leave some room for adjustments and take what your broker tells you with a pinch of salt.
Even sellers may not be aware of some details. But lawmakers and bureaucrats may, and it is this kind of information that makes up level 3. This includes details about new infrastructure projects in a locality, like a new airport, relaying of roads, or other such projects in the pipeline. People who know these details may use the information to buy houses at low prices in such areas and profit off the value appreciation.
It may seem unfair, but the onus of finding out the information needed typically falls on the buyer or the renter. With new-age solutions and many top real estate companies stepping in to bridge this data gap, it may become easier for buyers and renters in the coming years.
If you are a prospective buyer or a renter, you can even simply search for the property online and check out resident reviews (this works for apartment complexes - not for independent houses).
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Information asymmetry takes place when there is an imbalance between two negotiating parties in their knowledge of relevant factors and details. Typically, that imbalance means that the side with more information enjoys a competitive advantage over the other party.
For instance, if a homeowner is looking to sell their house, they would hold more information about the house than the buyer, this is an example of information asymmetry.
The asymmetric information of sellers is when during certain transactions, sellers take advantage of buyers because asymmetric information exists where the seller has more knowledge of the good being sold than the buyer.