Australian Property Market Update: Latest Data by State – November 12, 2024
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October 24, 2024
Why agents underquote property prices and how to outsmart them
Have you ever been to an auction where the property sold for hundreds of thousands more than the agent’s quoted price range?
I certainly have, and I know many disappointed buyers who have missed out because they were misled by an agent’s quote.
To provide a clear explanation, underquoting occurs when agents lure potential purchasers to a sale by auction by suggesting that the property will sell for much less than they actually believe it will. This often results in prospective buyers being drawn in, only to see the property sold for far beyond their expectations.
It may be illegal and often considered unethical, but underquoting still happens in some cases.
However, it’s crucial to draw a distinction between underquoting—where the quoted price is significantly below the expected sales price or auction reserve—and situations where competitive bidding drives the final sales price far above the vendor’s reserve.
The purpose of an auction is to secure the maximum price for a property by placing potential purchasers in a competitive environment. I’m frequently amazed by how an emotional buyer, in their eagerness, pushes up the price of a home.
Given this, it’s not surprising that agents occasionally get it wrong, especially in Melbourne, the auction capital of Australia, and in the fast-moving Sydney property market.
WHY DO AGENTS UNDERQUOTE?
Years ago, the phrase “quote it low, watch it go, quote it high, watch it die” was a favorite among agents, capturing the reason for underquoting.
However, in recent years, tougher legislation has made many agents more cautious about this practice.
Here’s what typically happens when agents meet with prospective sellers.
A homeowner considering selling asks several agents what they think the property is worth. Naturally, vendors tend to lean toward the agent offering the most generous appraisal.
In many cases, the agent may lower the quote during the marketing campaign to generate interest and get as close as possible to the vendor’s hopes.
Throughout this process, they work to adjust the vendor’s price expectation to a more achievable level by providing market feedback.
The agent’s role is to broker a deal between a vendor aiming for top dollar and a buyer who wants to avoid overpaying. During an auction campaign, the agent walks a tightrope, unable to reveal the vendor’s real reserve price, while buyers keep their cards close to their chest, not revealing how much they’re willing to pay.
Instead of disclosing a price, agents typically use a price guide or range, which they may amend (often upward) as the auction campaign progresses. This balancing act is key to a successful selling campaign.
WHAT ARE THE REGULATORS DOING?
Real estate operates under state-based law, and generally, selling agents are prohibited from quoting below the vendor’s reserve price or the agent’s estimated selling range of the property. To prevent underquoting, the vendor’s reserve price and estimated selling range are supposed to be included on the auction authority, which is signed by both the selling agent and vendor before the marketing campaign begins.
However, in practice, these requirements are easy for agents to bypass.
For instance, the vendor is not obligated to disclose a reserve price until the day of the auction, so there is no need to include the reserve on the auction authority.
As for the estimated selling range, inserting a low estimated selling range gives agents the ability to quote low.
While I’m not implying that most agents engage in this behavior – they don’t – the reality is that the legislation remains a toothless tiger.
NEW LAWS
Offers-over campaigns became illegal in New South Wales following new legislation that took effect on 1 January 2016, a situation already in place in Queensland.
According to the NSW Office of Fair Trading, the underquoting reforms were implemented to stop understating property prices. Under the new rules, real estate agents commit an offense if they state or publish a price that is below their reasonable estimate of the property’s sale price likely to be, as outlined in their agency agreement with the vendor.
Reforms to the Property Stock and Business Agents Act 2002 introduced clearer rules for real estate agents and more effective documentation that must be presented during inspections by the NSW Office of Fair Trading.
Crucially, agents found guilty of underquoting a property may face fines of up to $22,000 and forfeit their commission and fees. The Victorian Government has also taken steps to stamp out underquoting with new legislation effective from 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 not exceeding 10 percent. Furthermore, the price cannot include qualifying words or symbols, such as offers-over campaigns or $650,000+. These underquoting reforms aim to stop understating property prices and ensure a reasonable estimate is provided in the agency agreement with the vendor.
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 are also required to update the advertised price if it changes during the sales campaign.
Since the new legislation was enacted, Consumer Affairs Victoria has initiated enforceable undertakings against underquoting practices.
Additionally, compulsory contributions amounting to tens of thousands of dollars have been mandated for payment into the Victorian Consumer Law Fund by real estate agents found to have contravened consumer laws and property laws. Compliance with these regulations is essential.
HOW SHOULD BUYERS APPOACH PRICE GUIDES?
- As a buyer agent, it’s important to recognize that underquoting can occur. While I’m not justifying underquoting, it makes sense to adopt a pragmatic approach to navigate it effectively.
- Conduct your due diligence to assess the property’s value and determine the maximum amount you’re willing to pay. Research online, attend auctions, speak with a variety of estate agents, and monitor auction results to gather insights.
- Be realistic—use the agent’s estimated selling price as a guide only, and keep in mind that the seller is unlikely to set their auction reserve price (which may be above the advertised price) until the day of the auction.
- If the agent is quoting significantly less than what you believe the property is worth, ask them to justify their advertised price. This may present an opportunity to make a strong pre-auction offer.
- Level the playing field by considering the services of an independent buyer’s agent. These professionals have access to sales data and can analyze and interpret the information accurately.
A skilled buyer’s agent can also assist in the negotiation process or bid at auction on your behalf. They may even leverage their professional relationship with the selling agent to peek behind the curtain and discover what price the vendor truly desires and what other potential purchasers might be willing to offer.
Buying a property at auction can evoke a range of emotions. Be prepared and strive to understand what’s going on, so you can take part without getting hurt.
For expert guidance in navigating the property market and to avoid the pitfalls of underquoting, consider partnering with Ash Buyers Agency. Our experienced buyer’s agent in Sydney is dedicated to helping you find the right property at the right price. Contact us today at +61 434 111 200 or email us at info@AshBuyersAgency.com.au for personalized support in your property journey.
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