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?