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Flow networks are channels of economic exchange networks formed to enhance performance by accessing group resources to complete tasks which would otherwise be less efficient if an actor relied on individual skills only (Borgatti and Halgin, 2011, Podolny, 2001)

In real estate studies, albeit largely focused on residential markets, social networks are explored as alternatives to conventional ways by which buyers find houses like using brokers and classified advertisements. A distinguishing feature of residential markets is that buyers typically search for properties (See Stigler, 1961, Anglin, 1997, DiMaggio and Louch, 1998, and Benefield et al., 2011). Residential markets have large transaction volumes and buyers such that vendor uncertainty is relatively low. Vendor quality is secondary to the quality of the property which is contingent of individual housing consumption needs (See Ioannides 1987, Henderson and Ioannides 1989, and Van der Vlist et al., 2002). Studies presented below demonstrate the use of social relations in real estate markets.

Röper et al. (2009) investigate cases where individuals use social networks to find houses for purchase or rent and if social networks enhance satisfaction of houses. They examine network characteristics and circumstances which induce people to rely on informal channels of finding a home at the time they move. Individuals search for information if the expected benefits exceed the search cost, and adopt a search strategy with the highest net benefit (Stigler, 1961 also alludes to this perception). In markets characterised with information asymmetry, demand- and supply-side information holding often differs to some extent. Seekers, that is, potential buyers and renters, may not know if the information that they have access to is complete and relevant for decision-making. Informal channels often provide information with the right timing. House purchases or renting are infrequent transactions and are unlikely to involve the same trading partners in subsequent transactions. Extensive search provides information on available opportunities, while intensive search focuses on establishing trust on a few lucrative offers. The likelihood of using network to find a home is contingent on the potential of networks in providing non-redundant information, and situational characteristics that drive the need to move.

Figure 4-9 below illustrates the network and contextual characteristics which affect the likelihood of using social networks to find a house.

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Figure 4-9: Factors influencing likelihood to use social network in finding a home

Source: Röper et al. (2009)

The following are expectations with respect to contextual characteristics. Firstly, since physical distance between origin and destination affects social ties which exist prior to moving, and area to move to is chosen before search begins, people who know someone living in a destination area are expected to find a home through social networks.

Secondly, personal circumstances such as vacating current premises, taking new job, investing available funds, or liquidating financial obligations, may change someone’s search preferences relative to the time frame required to access information necessary for decision making. People who are subject to an urgent need to move are less likely to find a home through social networks.

Chernobai and Hossain (2012) also establish that optimal search duration is contingent on the urgency to transact (short-term) and the need for an ideal future home type and location (long-term) if for investment purposes, or on consumption incentives for primary and secondary buyers.

Thirdly, transaction volumes influence the amount of market information that can be accessed immediately to make an informed investment decision. When transaction value is high and transaction volume is low, the downside risk of making a bad investment decision is huge and costly to reverse. Seekers are therefore more inclined to use social networks in a high value and low volume house purchase than in a low value and high-volume renting transaction.

Lastly, informal channels do not provide information to everyone at the same time. The advantage of having information early in a market characterised with scarcity enhances the attractiveness of finding a home through social networks. The possibility of missing opportunities because of relying on informal channels could discourage the use of social networks in scarce markets. The spread of house prices in the destination area will influence the likelihood of searching through social networks.

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The Röper et al. (2009) study finds contextual characteristics to have been more influential than network characteristics in buyers using social networks instead of brokers or advertisements to find a house. Buyers, because of the downside risk in the purchase transaction, were more likely to find a house through informal channels than renters. The influence of market scarcity on the likelihood of using informal channels was not reported. DiMaggio and Louch (1998) also find home purchases that did not involve brokers to be more search embedded than those concluded using brokers. They also find that home purchases through brokers are more search embedded than car purchases through dealers partly due to frequency of transactions and amount involved.

This finding is consistent with Yinger (1981) that house buyers tend to search more carefully and are willing to visit more houses before making an acquisition decision though involving unfamiliar intermediaries. Such search is attributable to the choice of addressing information asymmetry risk through ‘trusted’ informal sources being considered to have less opportunity cost than engaging a broker or relying on advertisements.

These studies conclude that contextual characteristics tend to be more influential than network characteristics, but raise important issues about the relevance of social networks in exchange transactions. Social relations do not replace, but complement economic reasoning as Rangan (2000), Baker and Faulkner (2004) and Fligstein and Dauter (2007) indicate. Secondly, the potential downside risk from transaction volumes, margins and spatial dispersion influence how actors tend to rely on network characteristics to resolve uncertainty. The larger the downside risk, the more the likelihood of using social networks in search (See DiMaggio and Louch, 1998). It may be important to investigate whether changes in market conditions affect the dynamics between egocentric and altercentric uncertainties such that shifting in dominant roles between vendors and buyers are accompanied with social networks dominated by actor relying on structural holes or status in market. Thirdly, it is of interest to establish whether regional variations in asset values lead to secondary markets characterised with actors who are rich in structural holes, and core markets with high-status actors. Though the study places the need to search on the buyer, its concept could be extended to understanding how mobility drivers and network characteristics are associated with brokers choices to use social networks in searching.

The cases discussed above reveal some consistencies with the claims about the role of social networks in economic transactions. The general outcome is that there is evidence that social networks can reduce vendor uncertainty through enhanced network size. Diverse social networks can also reduce buyer uncertainty over product quality and exchange partner’s behaviour. It has also been established that vendors tend to use social relations to transact with exchange partners with whom they do not have prior relations. Buyers tend use social relations with actors they have had prior interaction with to select potential exchange partners.

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Crowston et al. (2015) present an analysis of social (informal) networks and the success of intermediaries in the US housing market. They seek to establish which of the broker ties with buyers, sellers or other professionals are important to intermediation performance (social capital).

They posit that i) brokers with better direct or indirect ties with potential buyers and seller would be more successful owing to the importance of non-redundant ties, and ii) brokers with better ties with other real estate professionals would be more successful due to the importance of business networks in facilitating transactions through establishing trustworthiness and reciprocity prospects. They do not find significant association between broker ties with potential buyers or sellers and successful transaction completion. Rather they find association between broker ties with other professionals in the industry and success in transaction closing suggesting that informal search is instrumental to information gathering rather than buyer-seller matching.

Consequently, they postulate that the network of professionals around a broker forms a ‘quasi-firm’ which becomes a hub of activities providing a bundle of services coordinated by the broker.

These findings are critical to understanding the nature of broker interaction viz-à-viz whether the identity of the trading asset, the vendor and the potential buyer is problematic and/or important.

The association between relationships and completion of transaction processes in non-housing real estate markets, where repeat transactions are likely, has not been extensively explored. This nature of formal and informal search roles in markets where players have different levels of sophistication stimulates research interest in understanding intermediation in real estate markets.

In view of the complexity of search in real estate markets, it is important to initially understand the objectives of various search model before exploring how intermediaries employ these models to achieve intended search purposes.