Ever been to an auction where the property sold for hundreds of thousands of dollars above what the agent had quoted?
I certainly have and I know many disappointed prospective buyers who have missed out at auction by being misled by agents’ quoted price ranges.
Just to make things clear…the practice of underquoting is where agents lure potential purchasers to look at a property (usually for sale by auction) with the suggestion that the property will sell for much less that they believe it will.
It is illegal and many would say unethical, but it certainly still occurs.
However it’s important to draw a distinction between underquoting (where the quoted price is far below the expected sale price and or auction reserve price) and a situation where competitive bidding results in a sales price way above the vendor’s reserve.
An auction is designed to extract the maximum price for a property by bringing a group of potential purchasers together in a competitive environment.
I’m often surprised how high an emotional buyer pushes up the price of a home in their eagerness to it.
So it’s not unreasonable to expect that agents occasionally get it wrong in Melbourne – the auction capital of Australia – and in the current hot Sydney property market.
Why do agents underquote?
Years ago a favourite saying of many agents was: “quote it low, watch it go, quote it high, watch it die.”
While this may sum up why they underquote, over the last few years I’ve found more and more agents reluctant to underquote, in part not to fall foul of the tougher legislation that’s been introduced.
But this is what happens when agents meet prospective sellers…
An owner is thinking of selling so asks a number of agents to tell them what they think their property is worth.
And of course vendors are inclined to go with the agent that “quotes” them the highest price.
If the agent has been a bit generous in their appraisal, they quote less during their marketing campaign in an effort to generate enough interest in the property to get close the price the vendor hopes for.
All the while, they also manage the vendor’s price expectation down to an achievable level, quoting market feedback during the selling campaign.
It’s the real estate agents role to broker a deal between a vendor who naturally wants top dollar for their property and a buyer who doesn’t want to pay too much.
So during an auction campaign the agent walk a tightrope not being able to disclose the vendor’s “real” reserve price while buyers, understandably, keeping their cards close to their chest and not honestly telling the agent how much they are prepared to pay for the property.
So rather than disclosing a price, the selling agent advertises a price guide or range and sometimes amends this (usually up) during the auction marketing campaign.
What are the regulators doing?
Real estate is a state based law, but in general selling agents are prohibited from quoting below the vendor’s reserve price and the agent’s estimated selling range of the property.
In an attempt to prevent selling agents underquoting, both the reserve price and estimated selling range should be inserted on the auction authority which is signed by both the selling agent and vendor prior to the marketing campaign commencing.
However, in reality these requirements are easy for agents to avoid.
And in the case of the estimated selling range, inserting a low estimated selling range allows them to quote the property low.
Again, I’m not suggesting that most agents do this – they don’t.
I’m just saying the legislation is a toothless tiger.
New laws in NSW
Offers-over campaigns will become illegal in New South Wales under new legislation that is about to be introduced in parliament.
This is already the situation in Queensland.
Under proposed changes to the Property Stock and Business Agents Act 2002, agents will no longer be able to use ‘offers over’ or ‘offers above’ or similar statements in their marketing.
Another major reform will require agents to provide evidence of their estimated selling price to the vendor, and to then include this estimate in the agency agreement.
Agents will only be allowed to use the estimated selling price in the agency agreement when marketing a property.
If an agent makes a written or verbal statement about the likely selling price during a campaign, this must match the estimated selling price listed in the agency agreement.
Agents will also be required to keep a register of prices quoted on a property, whether these are provided to the vendor or prospective purchasers.
Anyone caught breaking the law will not only be liable for the current penalty of $22,000, but will also have to forfeit any fees from the sale.
How should buyers handle price guides?
1. As a buyer it’s important to be aware that underquoting takes place.
I’m not justifying underquoting, but since it occurs, it makes sense to have pragmatic approach to it.
2. Do your own due diligence regarding the property’s value and the maximum you are prepared to pay.
Search the Internet, attend auctions, speak with a variety of estate agents and monitor auction results.
See what the final selling price is and how it compared to the quoted price range before auction.
3. Be realistic – use the agent’s estimated selling price as a guide only, and realise the seller is unlikely to set their auction reserve price (which might be above the advertised price) until the day of the auction.
4. If the agent is quoting significantly less than what you believe the property is worth, ask the agent to justify their advertised price.
Maybe this is a good property to make a strong pre-auction offer on.
5. Level the playing field – consider engaging the services of an independent buyer’s agent.
These professionals have access to sales data and are able to analysis and interpret the information correctly.
A good buyer’s agent can also assist in the negotiation process or bid at auction for you.
They may also be able to use their professional relationship with the selling agent to peek behind the curtain and find out what price the vendor really wants and what other potential purchasers may be prepared to offer.
Buying a property at auction brings out the best and worst of our emotions.
Be prepared and understand what’s going on in order to take part without getting hurt.
Looking for help bidding at an auction?
If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.