Take that price guide with a grain of salt: Underquoting

Take that price guide with a grain of salt: Underquoting
Take that price guide with a grain of salt: Underquoting

We’ve all at some point, attended an auction where the price soars past the price guide you were given and you’re left frustrated that you were coaxed into thinking you had a chance, or you’re simply baffled by the frenzied bidding that threw you out of the game long ago.

Accusations of underquoting are increasing in the property market and some tout this greedy practice as a necessary evil.

“Ironically, the practice that frustrates buyers is the same one that enables the auction system to work in the first place,” says Mark Armstrong.

Property Observer proposed the following question to professionals active in the field and industry bodies.

Is underquoting an issue we should be focusing on? If yes, how should we go about addressing it?

 

Jacque Parker – President of the Real Estate Buyers Agents Association of Australia (REBAA) jacque-parker-porfile-3

UNDERQUOTING IS AN ONGOING PROBLEM THAT GIVES HOME BUYERS UNREALISTIC EXPECTATIONS

As a leading real estate industry body, REBAA clearly views underquoting as an ongoing problem which gives homebuyers unrealistic expectations and costs them money in unnecessary inspections. It also damages the reputation of selling agents who knowingly engage in deceptive practices and put simply, attracts the wrong market for the vendors – those who can’t afford the property.

The Office of Fair Trading has the power to enforce fines on selling agents who get caught underquoting that are not much more than the average commission earned for selling a property. Considering underquoting is fairly endemic, these fines are neither enforced nor act as much of a deterrent.

While the vendor ultimately sets the reserve (with some of the blame ultimately falling on pure greed in some cases), the selling agent has a responsibility to the public to inform them of a realistic price range or guide for property. In my opinion, this should be the identical range or estimate that is provided on the listing sales agreement with the vendor. If this can be legislated on a national basis, then at least it provides consumers with some reassurance that the estimation and selling price are one and the same.

 

Ben Kingsley – Chair of Property Investment Professionals of Australia (PIPA)ben-kingsley-profile-2

I DON'T SEE IT AS AN ISSUE, THE CHALLENGE IS TO ENSURE THE MESSAGE IS CLEAR TO ACTIVE BUYERS

When it comes to property, as with any other asset, I'm a believer in a free open market, where values are determined by a willing buyer purchasing from a willing seller. When it comes to valuing property it can be a subjective opinion, and even qualified valuers with years of experience sometimes disagree with the value of a property.

On one hand I do have a small amount of empathy with real estate agents who have to advise their vendors of an appraisal value of their homes prior to marketing it.  Yet in a moving market under auction conditions the results achieved are often well above the quote estimated range prior to the auction and the reserve set on the day.  This is the cause of obvious frustration for buyers who consistently miss out, expecting the property to be sold for less.

However on the other hand, it's obvious some agents overuse the 'quoting low strategy' of starting the marketing campaign at the bottom end of their appraisal value to create initial interest in the property.  For those active in the market, it usually doesn't take long for buyers to work out which agencies use this tactic and they expect the property to sell 10 - 15% above the quoted price.

It's impossible to know what is going to take place at an auction on the day and as our buyers agents at Empower Wealth can attest, some auctions will surprise even the most experienced campaigners with the result, but most will fall within the value range that an experienced professional will have determined prior to the auction.

So, I don't see it as an issue.  I think the challenge is to ensure the message is clear to active buyers - get better educated!  They must do extensive research of the location and comparative sales leading up to the auction, this way they should not be disappointed or surprised by the result.

Next page: Frank Valentic and Paul Biller



Frank Valentic – Managing director of Advantage Property Consulting

FrankValentic-profile

MORE ADEQUATE POLICING AND HARSHER PENALTIES/FINES FOR THOSE THAT BREACH THE TRADE PRACTICE'S ACT

I think underquoting has always been an issue with a minority of agents over the last two decades that I have been buying and selling property. There are a minority of agents who will continue to do so and have deceived buyers in the past by quoting lower prices as “bait prices” to attract buyers to their properties in the hope of picking up that bargain that everyone wants. The old adage of “quote it low and watch it go and quote it high and watch it die” has rung true with these minority of agents who purposefully aim to deceive buyers.

I believe that we should go about addressing this issue with more adequate policing and harsher penalties/fines for those that breach the Trade Practice's Act. I cannot remember the last time when there was any media coverage about this in the last couple of years when most buyers and agents know that the practice exists, just as dummy bidding existed until harsher laws/penalties were introduced.

I believe this would be helped if it was mandatory for agents to quote a range in writing on their ads and the practice of “no quoting” to be abolished as these agents would be more accountable with proof of ads in writing.

In summary, I think underquoting is an issue with a minority of agents, which unfortunately taints all agents with the same brush and gives the industry a bad name. If agents were asked to provide more comparable sales (eg: 10 rather than the current three required by Consumer Affairs) and the vendors reserve price or agent’s market estimate prices had to be within the price range quoted this would elevate some of the problems.

Agents can’t be blamed though when the reserve is within the quoted range but the market takes it 10-20% plus above reserve which is happening at numerous auctions now.

 

Paul Biller - Principal of 1st City Hasemer & Caldwell-Eyles

THE REAL ISSUE ISN'T UNDERQUOTING, BUT THE PUBLIC'S MISCONCEPTION ON PRICE GUIDESbiller-profile

When an exceptional result is achieved at an auction, there can be a downside. Complaints of underquoting are made by purchasers who have missed out on purchasing a property.

Strong auction results and growth in property prices this year has highlighted the widespread issue of underquoting and the frustration of buyers who miss out when properties sell for more than the quoted estimate - particularly after investing time and money into strata reports; building and pest inspections and solicitors.

The reality is that real estate agents can’t possibly predict exactly what a property will ultimately sell for in an auction, and with competitive bidding, the final price may well exceed both the vendor’s and the agent’s expectations.

When a real estate agent is appointed to auction a property – an auction agency agreement is signed between the agent and the vendor outlining various details and terms of the forthcoming sale including the agent’s opinion of value. Most agents will quote within 10% of this figure. This opinion is generally formed and substantiated by recent sales of properties with comparable attributes in the area, however, even if the agent researches comparable properties and quotes a price estimate that they genuinely believe is realistic, there’s no guarantee that the property at hand will sell within that range.

Quoted price estimates and comparable sales results should be taken as guides only. Ultimately, it’s the different spending limits of each bidder, their motivation for wanting the property and the intensity of competition that count on auction day.

The real issue isn’t underquoting, but the public’s misconception that an advertised or quoted price guide is the level at which the property is likely to sell. This is not necessarily the case.

 


As more responses come through, we will continue to update.

Edwin Almeida - Managing partner at Just Think Real Estate (Added Friday afternoon) almeida-oct-31-profile

AGENTS TO BE MADE TO DISCLOSE THEIR CURRENT MARKET APPRAISALS

Some agents believe the general public are still in the dark ages and that only they have the power or the understanding of their local market conditions. In the most, they are sadly mistaken. But they persist on underquoting for the sake of drawing a crowd to their auctions.

Yes, this does assist with the emotional frenzy from the buyers and adds to the end values of the property to a degree. This brings foreign buyers to the area that usually have money to burn.

However, it is time this practice was stopped and agents made to disclose their current market appraisals (CMA) when showcasing the property. After all this is something they will have to disclose to the Office of Fair Trading if they were questioned at any time as to how they came up with a sale price.

Sadly though, when agents do underquote, the majority of general public know and all it creates is a bad feel and taste with respect to agent's behaviour and character. The only parties oblivious are the foreigners to the area.

But let's take it further and also ask what should be done with respect to vendors allowing the practice of underquoting to be endemic. The agent will say "price it low watch it go." and the vendor will agree believing this to be a legitimate market strategy not realising they are engaging in deceptive and misleading conduct.

Greater and more stringent enforcement of on spot fines and disclosure (advertised) of reserve pricing will have a strong impact in controlling this practice. It is when there is true transparency that we can truly boast that market forces drove a price point to unbelievable highs.

 

Garth Rothwell - Licensed real estate agent at Property 1 Real Estate (Added December 11)garth-dec-11-profile

PRICE GUIDES ARE NOT MISLEADING FOR BUYERS WHO HAVE DONE THEIR HOMEWORK

Are price guides misleading? The short answer is no, price guides are not misleading for buyers who have done their homework and researched recent sales within the suburb within the last six months, as for buyers who have no knowledge of recent sales and rely solely on the price guide they have have effectively abdicated their responsibility to do their own research.

The majority of buyers use the price guide as a starting point and I have yet to meet anyone who believed the price guide to be an absolute statement of value. Every buyer I have negotiated with during the auction process has had their own opinion of value and has always discarded the price indicator in favour of their own opinion especially when they believe the price indicator is too high.

Obviously if you take away the price indicator the bidding starts from zero as in the old days (70s & 80s) when auction agents would never disclose or discuss price even upon threat of death (I was taught old school) however this practice frustrated many inexperienced buyers and made them feel very intimidated.

The most common price indicator is the fixed price as it is simply an indication of the price the owner would like to achieve and 99% of properties with fixed prices 'reduce their price" yet I do not see the public, politicians and media complaining about this process because the price is seen to fall causing buyers to think they have won a discount. Same principle, different psychology, one starts high and reduces the other starts low and increases, so to use a famous quote, please Explain why one method should be considered unethical and the other normal practice?

The psychology of the buyer at the  auction is to ask questions to try and ascertain the lowest price the owner will accept, all buyers are looking for a bargain and the buyer is entering a process of negotiation, unfortunately many buyers are poorly trained in this skill, the saying, quote them low and watch them go and quote them high watch them die is very true, however it is the buyers who make it true by their actions and their perception of how to negotiate.

Though the one question no one has ever been able to answer is, if price indicators are so misleading why do buyers turn up with enough money to buy the property? After all, people with cash usually want a discount, don't they? Obviously 99% buyers are not misled at all and bargain hunters are just aggrieved at missing an alleged bargain and as for the 1% who do not do their homework, that is their responsibility.

As for the governments decision to remove price indicators, the agents will simply use the term bargain. There are a 100 ways to infer the concept without using a price guide, so unless the government wants agents to negotiate in braille it won't make any difference. The reality is you cannot legislate human emotion or opinion and it is waste of time attempting to do so - it will ultimately prove to be 'much ado about nothing".

ntrotman@propertyobserver.com.au

 


Nicola Trotman

Nicola Trotman

With a penchant for the written word, Nicola has built a career doing just this – now Creative Director at thriving Melbourne-based PR agency, Greenpoint Media.

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