Why agents underquote property prices and how to beat them

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 by 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 Sydney property market, too.

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 past 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 to the price that 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 agent's 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 walks a tight-rope. not being able to disclose the vendor’s “real” reserve price, while buyers, understandably, keep their cards close to their chest by 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.

Firstly, the vendor is not required to disclose a reserve price until the day of the auction, so there is no requirement to record a reserve price on the auction authority.

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

Offers-over campaigns became illegal in New South Wales under new legislation that came into effect on 1 January 2016.

This is already the situation in Queensland.

According to the NSW Office of Fair Trading, the underquoting reforms were designed to stop understating property prices. 

Under the new rules, real estate agents are committing an offence if they state or publish a price that is under what their reasonable estimate of the property's sale price is likely to be – which is the price estimation contained in their agency agreement with the vendor.

Reforms to the Property Stock and Business Agents Act 2002 included clearer rules for agents as well as more effective documentation, which must be produced during an inspection by Fair Trading officers.

Importantly, agents may be fined up to $22,000 and lose their commission and fees if they are found guilty of underquoting a property.

The Victoria Government has also moved to stamp out underquoting with new laws coming into effect on 1 May 2017.

According to Consumer Affairs Victoria, from that date a property's listed sale price must be either a single digit or a range of up to 10 per cent.

Also, the price can't use qualifying words or even symbols, such as offers above or $650,000+.

The reforms mean that is it now illegal for a sales agent in Victoria to advertise or advise buyers of a price that is: 

• The seller's auction reserve price or asking price
• A price in a written offer already rejected by the seller on the basis it is too low, or
• The agent's current estimate of the likely selling price.

Agents must also update the advertised price if it changes during the sales campaign.

Since the new legislation came into force, Consumer Affairs Victoria have already instigated enforceable undertakings for underquoting.

What's more, compulsory contributions in the tens of thousands of dollars have been required to be paid into the Victorian Consumer Law Fund by real estate agents found to have contravened consumer and property laws.

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.

About Bryce Yardney Bryce is a property development specialist, having successfully sourced, project managed and completed hundreds of development projects for Metropole’s clients, helping them create substantial wealth.