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Peter Rogozik Property Consulting

The Truth about Underquoting

The practice of selling agents deliberately and substantially underquoting the likely selling price of an auction property will never be eradicated. This strategy has been implemented for the purpose of attracting buyers to inspect a property and potentially become involved in the bidding process. In essence it is based on deception similar to bait advertising. A buyer is lured in to inspect a property after being advised of a likely selling price that is well below current market value and/or the vendor’s reserve price.

Selling agents prefer to have buyers at an auction even if the buyer falsely believes the property is worth substantially less than its actual market value and likely selling price. Greed and fear are common underlying emotions that guide decisions regarding large financial transactions. These two factors are also a major reason why selling agents resort to substantial underquoting.

Greed relates to the possibility of the selling agent not earning a commission. It is impossible to make a sale and earn a commission without buyers at the auction.

The fear factor also comes into effect when the selling agent fails to attract a buyer to the auction. The selling agent then has to explain to the vendor why this occurred given the high expectations at the start of the marketing campaign.

In these situations selling agents are doing their vendor client no favours despite their sales rhetoric on the benefits of such a strategy. Talking down the selling price of a property by a substantial margin will result in buyers being conditioned to believing the property is worth much less than its true market value. Only the very few astute buyers, who have done their homework and have an understanding of market value, will be in a position to purchase the property. Substantial underquoting does not engender competition on the day of the auction.

The type of underquoting that should be outlawed is substantial and deliberate underquoting. I don’t believe there is anything wrong with quoting a sale property conservatively. Circumstances can change during the marketing campaign that may result in buyers not embracing a property as was expected. For example, market conditions may change due to economic factors. However, I regularly encounter substantial and deliberate underquoting at auctions in Melbourne.

There are two different types of underquoting. The first and most common type of underquoting occurs where the selling agent quotes well below the market value of the property, but the property is announced on the market in a price range considered market value based on recent and comparable sales. As the property is announced on the market at a fair and reasonable price, informed buyers feel they have not been duped. I personally don’t have an issue with this type of underquoting.

The second type of underquoting is similar to the first type in that the property is quoted well below its current market value. However, instead of the property announced on the market at its current market value, it is passed in at auction despite substantially surpassing both the advertised price range and its current market value. This type of underquoting causes much anger among buyers.

In this situation buyers feel they have been lured to the auction on false pretences. Many buyers have wasted money on pre-purchase building and pest reports and engaging a lawyer to check the contract and vendor’s statement. Buyers have wasted time inspecting the property, not to mention the emotional rollercoaster that most people endure when making what is usually the most expensive purchase of their life.

When the second type of underquoting does occur many selling agents blame the vendor for increasing their reserve price on the day of the auction. Personally I don’t accept this excuse as legitimate in the majority of situations. The selling agent coordinates and controls the marketing process.

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They are supposed professionals who orchestrate the whole marketing campaign. A selling agent should not engage a vendor whose price expectations are unrealistic. Unfortunately, many selling agents do in the hope that the vendor will become realistic during the course of the marketing campaign.

The legislation outlawing underquoting was enacted in 2004. Amazingly there have been only a few prosecutions in Victoria. The statutory authority whose role it is to oversee the real estate industry in Victoria is Consumer Affairs. They have put this problem in the too hard basket and are no longer interested in monitoring the practice of underquoting. The reality is Consumer Affairs Victoria don’t have the time, expertise or motivation to effectively monitor underquoting.

Unfortunately consistency has not been a hallmark of the regulator. The few selling agents fined for underquoting can rightly feel they have been made scapegoats given the overall frequency of underquoting.

Trying to outlaw underquoting is akin to flogging a dead horse. As well as having a toothless tiger as the regulator there also exists a loophole in the current legislation that allows selling agents to avoid playing by the rules.

As the regulations stand at the moment selling agents are prohibited from quoting below the vendor’s reserve price and the estimated selling range of the property. The estimated selling range of the property is decided by the selling agent after analysing recent and comparable sales. 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. This regulation was introduced in an attempt to prevent selling agents underquoting.

In reality these requirements are easy for selling agents to avoid. 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. In the case of the estimated selling range, selling agents merely insert an estimated selling range that is artificially low, therefore allowing them to quote the property low.

Another method of avoiding prosecution, which has come to the fore over the last 12 months, is the practice of not including written quote prices on marketing brochures. In these situations selling agents only make verbal representations about the likely selling price. When a buyer requests a likely selling price range for a particular property the agent will state there is “buyer interest” around a certain figure. By using the term buyer interest a selling agent avoids making direct representations about the quote range. This buyer interest price range is always more than 20% below the market value and eventual selling price of the property.

The strategy of not stating a quote price on marketing brochures can negatively impact on the marketing campaign for most properties. The majority of property buyers source via the real estate web portals. That pool of buyers who are not highly motivated to purchase a property may not enquire about an estimated selling price if one is not stated on the web portal advertisement. In these circumstances this results in a lost opportunity for the selling agent to engage the prospective buyer.

What does all this smoke and mirrors mean for property buyers? Quite simply there are two solutions to this issue for property buyers. These two solutions are applicable to the first type of underquoting as described above.

Solution one is buyers becoming familiar with property prices to ascertain for themselves the true market value of the property. Buyers need to attend auctions every Saturday for at least three months in their preferred suburbs. They will see first hand what properties are selling for and can recognise for themselves when a property is underquoted.

If solution one sounds like too much hard work, solution two involves engaging the services of either an independent buyer’s advocate or a registered valuer. These professionals have access to vital sales data and are able to analysis and interpret the information correctly. A buyer’s advocate can also assist with the negotiation process and ensure a property is purchased at the lowest possible price.

Unfortunately if you encounter the second type of underquoting there is nothing you as a buyer can do. However, most buyers eventually become sellers. If you do become the victim of this type of underquoting, my advice is don’t hesitate to inform the selling agent that his services will not be required when the time comes to sell your property.

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