When it comes to the property market, you have to be able to play the game – but do you always have the tools and knowledge to do so?
Here’s a transcript of the interview:
(Alternatively you can listen to the short podcast at the top)
Kevin: The topic for this week is about underquoting on property prices – Particularly as this relates to auction.
Michael: There’s a lot of auctions where the properties have sold for hundreds of thousands of dollars more than the agents have quoted, and that’s certainly disappointed many perspective buyers who’ve missed out at auction, sometimes being misled by the agent’s quoting range.
Kevin: It’s difficult, because agents are not valuers, yet they’re expected by buyers to give them an indication – fairly so, about where the bidding will start or where it might finish.
Michael: That’s true, and let me first explain that most agents are not being dishonest.
There are two elements to it.
Sure some agents do try to lure a large crowd to the auction by quoting on the low end of the range.
But it’s important to draw the distinction between underquoting and the situation where competitive bidding results in a sale price way above what the vendor’s reserve was.
Kevin: That use to be a saying, “Feed the greed.” Get the buyers there, give them a low indication.
Michael: Another saying agent’s use is “Quote it low, watch it go. Quote it high, watch it die.”
Kevin: That’s exactly right.
Those sorts of things are fairly well embedded in the industry.
But the culture nowadays, is that agents are a lot more understanding that they have to be very transparent.
Michael: In fact – it’s illegal to underquote.
But let’s remember that the auction process is designed to extract the maximum price for a property by bringing together a group of potential purchasers in a competitive environment.
It’s still regularly surprising how high an emotional buyer will push prices just in their eagerness to get it.
None the less, an auction is a good way to sell many properties.
Kevin: As mentioned it would apply to a buyer in every state except Queensland.
The reason being is that in Queensland, the agents simply cannot quote a figure; they can only give competitive market analysis, which is an indication of what is sold in the area, which seems to me, to be abundantly a much fairer situation.
Michael: Let’s look at what happens:
An owner who’s thinking of selling their property asks a number of agents to tell him what they think his property is worth.
Of course, the vendor is inclined to go with the agent who gives them the highest price, one who “quotes” them the highest price.
Now that’s not necessarily the right way to do things because some agents are a little generous in their appraisals.
They quote a highish price, but during the marketing campaign, they put a lower price bracket there, hoping – over time – to get the eventual selling price close to what the vendor hopes for.
Unfortunately, the estate agent is in a difficult position.
He’s a broker between the vendor, who naturally wants a top price, and the purchaser, who doesn’t want to pay too much, so during the auction campaign, they’re walking this tightrope, not being able to disclose the vendor’s real reserve price, while buyers understandably keep their cards close to their chest also, and they don’t honestly tell the agent exactly how much they’re prepared to pay, either.
Kevin: There’s a pretty simple solution from both sides, and that is that the seller should always get a valuation done, maybe an independent valuation, and buyers should really do their own homework and have that ceiling limit.
Michael: Currently what’s happening is the regulators are getting into stop underquoting.
Real estate is a state-based law, and in general, selling agents are prohibited from quoting below the vendor’s reserve price and also below what the agent’s estimated selling range is.
Kevin: Quite often, though, reserves are changed, even midway through the auction, so it’s very difficult for an agent when they’ve been told they can’t quote below the reserve because that reserve could quite easily change.
Michael: Often the reserve is only finalized the day or two before the auction.
Owners will often have an idea of what they want for their proeprty but that’s modified during the marketing campaign based on market feedback.
But you’re right, sometimes the reserve is changed mid way during the auction – where it can go up or down.
But there are a couple of ways that potential buyers can handle the price guides that are given out.
Kevin: What are they?
Michael: The first thing is it’s important to be aware that underquoting does take place.
I’m not justifying it, but since it does occurs, so it makes sense to have a pragmatic approach to it.
The next one is to do what you just said a moment ago, and that’s to do your due diligence regarding the property’s value and the maximum price you’re prepared to pay.
Research the Internet, attend lots of auctions, speak with a variety of agents.
Monitor auction results –not asking prices, not quoted ranges, but exactly what’s been sold and for what price.
Then be realistic.
Use the agent’s estimate as a guide only, knowing that it’s likely to sell considerably above that.
Consider engaging the services of an independent buyer’s agent because these professionals have, first of all, got access to all the sales data, and they’re able to analyze it and interpret it, which is probably more important, too, and they can also negotiate on your behalf.
Often, a buyer’s agent can speak to an agent, professional to professional, and they can go behind the curtain and see exactly what the vendor wants and what other people are saying that they’re prepared to offer so that you can put a good negotiating strategy at the auction day.
Kevin: Let me just even it out a little bit by saying that buyers need to realize that the selling agent is working for the seller.
Kevin: If you really do want to level the playing field, that’s a great way to do it if you don’t feel confident about bidding at an auction yourself.
As an independent player, using a buyer’s agent is actually a very good idea.
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