In Freakonomics, we wrote the following:
It is common that one party to a transaction has better information than another party. In the parlance of economists, such a case is known as an information asymmetry. We accept as a verity of capitalism that someone (usually an expert) knows more than someone else (usually a consumer). But information asymmetries everywhere have in fact been badly wounded by the Internet. Information is the currency of the Internet. As a medium, the Internet is brilliantly efficient at shifting information from the hands of those who have it into the hands of those who do not.
One example was real-estate transactions. The more a customer can learn via the Internet about, say, a property for sale and similar properties, the less likely she is to make bad decisions.
That said, there is still a lot of room for improvement. A reader named Sam Bauch describes his encounter with one particular area of information asymmetry in real-estate, and what he’s doing to stop it:
My brother and I moved into an apartment in Queens in the beginning of the summer after I graduated college. We found a two-bedroom, first-level duplex, so it had a basement room. With the first rainstorm, we had over a foot of water in the basement. It ruined a lot of stuff, and we knew right away we would have to move again. We were furious. As we were moving all the water-damaged goods on to the sidewalk, we met another resident of the building. She informed us that the flood problem had existed forever. The previous tenant broke her lease because of the issue, and the couple living across the hall from us had originally signed the lease on our apartment, but had learned about the flood problem and fought their way into the other available unit, using the same broker we would eventually deal with. All of a sudden, the new tile on the floor and halfway up the wall started to seem a little odd. Simply put, we felt like suckers. The real-estate broker had pushed us into signing the lease, telling us he had another potential tenant ready to sign. Thinking about the problem a little bit, we realized it was a simple case of information asymmetry made worse by the incentives placed on the broker.
Property owners are the unambiguous experts for the units they own, and the broker’s incentives align with the owner. It does most brokers no good to maintain a strict quality control on their inventory. The more apartments they have in the inventory, the quicker they can move large quantities of apartment seekers through the process to sign a lease, gaining a commission. Apartment seekers, meanwhile, can gather very little about an apartment they are considering. But those apartment seekers, and anybody living in an apartment in NYC, are experts on their own apartments. They know just as much, if not more, about a unit than the owner from having lived in the unit.
So we thought, ‘Who better to ask about an apartment we’re considering than the previous tenant?’ All we needed was a simple way for apartment dwellers who had met experiences like ours to let the world know. The obvious medium is the internet, and the currency we’re trading is information on bad apartments. To us, this information seems incredibly valuable. Property owners value the information and use it to apartment hunters’ detriment. Apartment seekers should also value this information, as it will prevent individuals from entering contractual agreements they would later regret.
So we created a website, www.BadNYCapartments.com to serve as this information portal. It allows any NYC apartment dweller to share their valuable information about a bad apartment, and then lets visitors to the site search the database to access that information. We’re also culling similar information from anywhere we can find, such as city agencies responsible for landlord maintenance violations, or some particularly bad apartments showcased on YouTube. Whether there’s an accessible metric for determining whether we’re leveling the playing field is hard to say, but we’re excited about the prospect of using some economic tools to try to improve housing stock and restore accountability in the rental market in NYC.
The website is in a very early stage; it will be interesting to see if it can flourish. I can imagine tens of thousands of people wanting to access data on bad apartments, but getting people to upload that data is the problem. What is their incentive?
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A possible incentive for posting: charge a modest amount (say, $10 or less) for access to all the information people have uploaded, but allow free access to anyone who submits a review of their own apartment. (Obviously it needs to be allowed to be good as well as bad.) This means that information will be posted almost entirely about available apartments whose tenants are moving within the city, so it may or may not suffice; I don’t know the breakdown of where people go when they move out of NYC apartments.
I don’t think the situation cited is information asymmetry — I think it’s fraud.
The landlord and the broker knew of a major structural defect and conspired to conceal the information.
If it were me, I’d be talking to a lawyer and complaining to city officials.
While this website idea is a noble one, realistically, the chances of creating an apartment database large enough to be useful to anyone is about zero. What would be useful, however, is to create a website that teaches prospecitive tenants how to track down and contact the people who lived in a particular apartment previously. Then just ask them what the apartment was like and why they moved. If it was bad, they will be happy to tell you, believe me.
I recently used this method with great success. I was about to rent an apartment and tracked down the previous renter who freely told me horror stories about the landlord, shoddy appliances, dodgy electrical wiring etc etc. Saved me a lot of grief.
And here’s Sam’s listing on his own site:
http://badnycapartments.com/index.php?option=com_sobi2&sobi2Task=sobi2Details&catid=3&sobi2Id=11&Itemid=5
The solution to the incentive problem seems simple: charge a small fee (in the $3-7 range) to seek information on the site (once it is affirmed that the property you want to know about has a review attached to it), and give a few nickels to the people who post reviews each time their review is read (via Paypal, etc). They could also put a rating system in place that would up the reward based on positive feedback to the review.
For larger apartment complexes, there’s been a review site for a decade or so: http://www.apartmentratings.com/
Apartment managers do place fake glowing reviews, and evicted tenants do post rants. But if there are a large number of reviews for the complex, one starts to get a feel for the place. (Also, if all the reviews are either furious or glowing, one can guess that landlord-tenant relations are lousy.)
The outcome of this website, sadly will be an increase in prices of apartments. Those who know they have bad quality apartments on the market will pay a price to get them fixed. Later when the improvements have been made, they’ll sell them. The new quality apartments will automatically rise in price because money was inputted, and the quality has increased. In the other hand, those who buy the lousy apartments will have to input their time and money to fix what needs fixing. No matter what your choice is, of buying a better quality or paying for improvements, you will have to spend money on the apartment.
Moreover, this website, seems a bit unfair. What will happen to those who got tricked just like the Bauch brothers into buying a bad apartment and would later want to sell it? The publishing of this information will not let them sell the apartment since no one wants bad quality. It is better to leave things as they are, and let them continue as they have been. Yes it is unjust, but it’s called doing business.
A very important thing we must always have in mind is that almost everything in this world is scarce. Nonrenewable resources are scarce, our time is scarce, and information is scarce. Unfortunately, we live in a corrupt world, in which peoples’ acting in rational self-interest can often conflict with each other. If incentives are found so apartment owners can share their experiences with apartment seekers through this website, then several outcomes will emerge. People seeking to sell or rent bad apartments will have to spend money fixing them so the reviews are good. This way people would be willing to live there and pay the prices asked. As people fixing the apartments will be spending money on this, they will probably be able to charge more because their apartment will be of better quality. Overall, apartment prices will very likely increase, but it will be because of the increase in quality. Real estate agents will now face a critical point as thy have to find new apartments to offer to apartment seekers, since prices will probably change if the business becomes transparent.
The problem with this idea, as explained by Dubner, is that there is no incentive for people to post their experiences for others to access. Because all humans act in rational self-interest, almost nobody would actually go online and spend time writing about their experiences buying apartments, since time is such a limited resource. However, if you charge a small fee to those accessing the information and pay a small amount to those sharing the information, then the information sharers will consider it. They will probably weigh the marginal benefits against the marginal costs, and use this to decide whether or not to share their experiences. Another idea would be to create a monthly fee that your website members could pay in order to read the information and pay a percentage of this to the information sharers.