The sale of real estate is an important once-in-a-lifetime transaction for many people. On the other side of the coin, however, the problem of "enclosure" has long been pointed out, which may be detrimental to the seller's interests.
Real estate, an important asset, is somehow not widely introduced to the public, and opportunities to sell are missed. This situation arises from structural issues in the real estate industry and the profit-seeking attitude of some vendors.
In this article, INA & Associates, Inc. looks at the core of the "enclosure" problem that hinders transparency in real estate transactions. From a specialist's perspective, we will explain everything from the Raines (REINS) system to the psychology behind vendors intentionally not disclosing property information and its structural flaws, and present concrete measures that sellers can take to protect their own assets.
What is REINS?
REINS is an abbreviation for RealEstateInformationNetworkSystem, a computer network system for the exchange of real estate property information operated by the "designated distribution system" designated by the Minister of Land, Infrastructure, Transport and Tourism. It was established under the Building Lots and Buildings Transaction Business Law for the purpose of sharing information among real estate agents.
This system is expected to enable real estate agents nationwide to share property information online and realize quick and smooth real estate transactions.
When a real estate agent receives a sales request from the seller through a full-time mediation contract or under-exclusive-contract exclusive duty mediation contract, it is obligated by law (Article 34-2 of the Building Lots and Buildings Transaction Business Law) to register the property information with Raines within a certain period.
This enables other real estate agents to view the property information and introduce it to the buyer, who is their own client. In other words, Raines is a system that forms the basis of a transparent and fair market for the entire industry to search for buyers, rather than having information monopolized only by specific real estate agents.
What is Enclosure?
Enclosure" refers to the act of a real estate agent who receives a request to sell, intentionally not disclosing property information to other agents, and attempting to find a buyer on its own.
Specifically, the technique of not registering property information with Raines or falsely declining inquiries from other vendors under the pretense that the property is "under negotiation" even if it is registered is used. The purpose of this act is to establish "two-sided agency" in which a commission is obtained from both the seller and the buyer.
There are two types of brokerage forms in real estate transactions: "one-handed brokerage" and "two-handed brokerage. The differences between them are summarized in the table below.
| Brokerage form | Outline | Mediating fee | Merit Demerit |
|---|---|---|---|
| One-handed agency | A form in which the vendor on the seller's side and the vendor on the buyer's side exist separately, and a transaction is concluded jointly. | The seller pays a commission to the seller-side vendor, and the buyer pays a commission to the buyer-side vendor. | Merit: Information reaches a wide range of potential buyers, and an early sale at a high price can be expected. Demerit: For a vendor, a commission can be obtained only from one side. |
| Two-sided agency | A form in which one real estate agent mediates for both the seller and the buyer. | A commission can be received from both the seller and the buyer. | Merit: For the vendor, commission income is doubled. Disadvantage: Information is limited, which may lead to lost sales opportunities for the seller. |
Enclosure is an act to intentionally create this two-sided mediation, and it can be said that it is an extremely problematic act which gives priority to its own profit rather than the seller's profit.
Why doesn't a contractor put it on Raines - Psychology of enclosure
The greatest motive for real estate agents to hesitate to publish information in Raines and to enclose is in the structure of a mediating fee.
The upper limit of the brokerage fee stipulated by the Building Lots and Buildings Transaction Business Law is fixed according to the transaction amount. Let us look at the commission when mediating a hypothetical 50 million yen property as an example.
| Mediation form | Commission from seller | Commission from the buyer | Total amount received by the vendor |
|---|---|---|---|
| One-handed intermediation | 1,716,000 yen (including tax) | 0 yen | 1,716,000 yen (including tax) |
| Brokerage on both sides of the transaction | 1,716,000 yen (including tax) | 1,716,000 yen (including tax) | 3,432,000 yen (including tax) |
*Calculation formula: (Sales price x 3% + 60,000 yen) + consumption tax
Thus, if a two-sided brokerage can be established, the vendor's profit is simply doubled.
This economic incentive gives some vendors a strong incentive to "find a buyer on their own, without passing property information to other companies. Real estate agents, who by nature should be working as the seller's agent to sell the property as quickly as possible and at the highest possible price, try to control the information in order to maximize their own profits. This is the psychology underlying the enclosure problem.
Structural flaws that prevent enclosures from disappearing
The enclosure problem is not simply due to a lack of ethics on the part of a few bad agents. There are deeper structural flaws in the real estate industry that are the breeding ground for this problem.
First, there is the issue of the compensation structure. As mentioned above, the fact that the two-sided brokerage is an extremely favorable remuneration system for the vendor is the biggest incentive for enclosure. This structure, in which the interests of the seller and the interests of the vendor do not necessarily coincide, can easily create conflicts of interest.
Second, the monitoring system and penalties are lax. Although registration in Raines is obligatory, information management after registration (e.g., updating the "under negotiation" status) is largely left to the vendor's report, making it difficult to accurately grasp the actual situation. Penalties for cases in which enclosure is discovered are rarely severe, such as an order to suspend business operations, and it cannot be said to be functioning adequately as a deterrent.
Third is the asymmetry of information. Expertise in real estate transactions is unevenly distributed on the vendor side, and it is not easy for ordinary sellers to detect the fact of enclosure. The situation in which they have no choice but to believe the words of the contractor, such as "We are advertising" or "Inquiries are coming in," makes the problem even deeper-rooted.
Finally, we cannot ignore the industry's old practices and the overly competitive environment. There is still a tendency in some parts of the industry to favor two-sided brokerage, and the reality is that there is no end to the number of companies that easily end up enclosing properties in an attempt to secure profits in a severely competitive environment.
Effects of Enclosure on Sellers and Buyers
Enclosure brings serious disadvantages to both the seller and the buyer. For the seller, it is nothing other than being deprived of the optimal sales opportunity that should have been obtained.
| Impact | Specific details |
|---|---|
| Lengthening of the sale period | Since property information is disclosed only to a limited extent, it takes time to find a potential buyer. |
| Decrease in sale price | Since a wide range of potential buyers cannot be recruited, the principle of competition does not work, and as a result, the property may be forced to be sold at a price lower than the market price. |
| Opportunity loss | This leads to the greatest opportunity loss: even though there were other applicants who wanted to purchase the property on better terms, they would close the transaction without ever knowing of its existence. |
For example, suppose a vendor received a request to sell at 50 million yen and surrounded himself or herself with the aim of brokering both sides of the deal. That vendor might recommend the purchase at 48 million yen to the customer found by the company, and conclude a deal.
However, if the information is widely disclosed through Raines, the possibility that a customer who wants to purchase it for 51 million yen from another vendor may appear cannot be denied. This would result in a lost profit of as much as 3 million yen for the seller.
Methods to Detect and Countermeasures against Enclosure
In order for the seller to protect his/her own interests, it is essential to detect the signs of enclosure at an early stage and take appropriate measures.
You should check the following checkpoints, and if you find anything suspicious, you should take a firm stand and ask for an explanation from the vendor.
| Checkpoints | Points to be checked |
|---|---|
| Raines registration certificate | When a full-time mediation contract or under-exclusive-contract exclusive duty mediation contract is concluded, a contractor registers property information in Raines and is obligated to deliver the certificate to the seller. Please be sure to receive it and check the contents. |
| Report on advertising activities | Ask for a specific report on the frequency of your advertising activities and in what media. Be wary if the report is vague or if the activity is not well documented. |
| Responses from other vendors | Ask, "Have you received any inquiries from other vendors?" and check regularly. If the answer is "not at all," there is a possibility that the information is not properly disclosed. |
| Portal Site Listings | Check whether your properties are listed on major real estate portal sites. If it is not listed or the information is inaccurate, this is a problem. |
The most reliable measure is to choose a real estate agent you can trust.
It is important to ask clear questions about their policy on the use of Raines and their approach to information disclosure during the interview before signing a contract, and to determine whether they have a stance of putting the seller's interests first. Also, a "cross-quote" is an effective means of consulting with multiple vendors, not just one. By comparing each company's proposals and responses, you can find a more reliable partner.
Conclusion
Enclosure" in the real estate industry is a malicious act that seriously undermines the seller's profit. Behind this lies the selfish motive of the vendor aiming for two-sided brokerage and the structural problems that the industry faces.
However, it is possible to greatly reduce the risk by the seller himself/herself acquiring correct knowledge and acting proactively.
The key is to view real estate agents as equal partners, rather than "leaving it up to them. Thoroughly checking the Raines registration certificate, asking for regular reports on advertising activities, and not being afraid to ask questions if you have even the slightest doubt are essential to protecting your assets.
Since our inception, we at INA & Associates, Inc. have been committed to thorough transparency, with our primary focus on maximizing the interests of our clients. We are committed to providing the next generation of real estate services that combine technology and integrity, breaking away from old practices such as enclosures.
If you have any concerns or questions about the sale of real estate, please feel free to contact us. We will work closely with each and every customer to provide the best possible solution.
Frequently asked questions
Q1:Is registration with Raines obligatory?
A1:Yes, when a real estate agent concludes a "full-time mediation contract" or "under-exclusive-contract exclusive duty mediation contract" with a seller by the Building Lots and Buildings Transaction Business Law, it is obligated to register property information to Raines within seven days and five days from the day following the date of contract conclusion, respectively.
Q2:Is enclosure illegal?
A2:In a full-time mediation contract and under-exclusive-contract exclusive duty mediation contract, the act of neglecting registration to Raines without a justifiable reason or manipulating registration information unjustly is a violation of the Building Lots and Buildings Transaction Business Law. In a malicious case, it is the object of an administrative disposition.
Q3:Is there any problem with two-sided brokerage itself?
A3:It does not mean that two-sided agency itself is illegal. As a result, the conditions of both the seller and the buyer match, and the case in which mediation is concluded by one company can occur naturally. What is a problem is the act of enclosure in which a contractor intentionally manipulates information for its own profit and "creates" two-handed agency.
Q4:How can I confirm whether or not I am surrounded?
A4:First of all, please ask for a "Raines registration certificate" and confirm whether your property is registered. Afterwards, "Decoy investigation" which asks another real estate company to inquire about your own housing by pretending to be a buyer is one method, but first of all, close communication with the contractor who concluded a mediation contract is basic.
Q5:How can I prevent enclosure?
A5:The most important thing is to discern the attitude of a contractor before making a contract. Ask specific questions about the transparency of information disclosure and a sale strategy, and select a contractor who can respond sincerely. Moreover, if a general mediation contract is selected, the risk of enclosure by one company is reduced because multiple contractors can be requested. However, since a general mediation contract has the possibility that a vendor's sales activities may become thin, it has one advantage and one disadvantage. It is ideal to conclude a full-time mediation contract with one company that can be trusted, and to advance sales activities on a tripod.
