"Quote 'em low, watch 'em go; quote 'em high, watch 'em die". It's a phrase many potential property purchasers may have heard – or even experienced. It's what's known as underquoting, where a real estate agent quotes a price to a prospective buyer that's less than their expected selling price for the property. The theory is that quoting low will attract as many buyers as possible, and therefore create competition and increase the sale price.
Underquoting certainly doesn't work in favour of buyers, who end up wasting time and forking out thousands of dollars in pre-purchase inspections and solicitor's fees – not to mention the emotional anxiety associated with buying a property.
Funnily enough, it doesn't always benefit sellers either, according to David Morrell, an advocate for purchasers and the director of buyer's agency Morrell and Koren. "It doesn't necessarily increase the price of the property," he says. What it does is work in favour of the agent, who gets to increase their database of potential clients, he says.
So what is underquoting exactly?
A property selling for more than the advertised price isn't necessarily proof of underquoting. For example, NSW Fair Trading says, this could be the result of intense competitive pressure between buyers. Neville Sanders, the former president of the Real Estate Institute of Australia (which represents its member base: real estate agents), says that in the majority of sales you can get a "reasonably good feel for what its value is", although it's "not a perfect science", he says. Variation may arise with market factors such as supply and demand and emotions attached to particular properties, says Sanders.
Morrell argues, however, that "any professional should be able to get within 5-10% [of the final sale price]". Similarly, South Australian legislation only allows a 10% difference between the price set in the sales agreement between the agent and the vendor and the final reserve price.
But if large discrepancies between the quoted price and the sales price aren't proof of underquoting, then what is?
Underquoting is about misleading sales practices by agents. Underquoting occurs when an agent makes representations about the price of a property – either through advertising or in one-on-one dealings with a potential buyer – that are less than their reasonable estimate of the property's selling price.
So what does that mean? When making a deal with someone selling their house or apartment, an agent needs to make a reasonable estimate of the selling price and document this in the sales agreement. The NSW legislation defines the reasonable estimate as: "the price or price range specified in the agency agreement for the sale of the property as the agent's estimate of the likely selling price of the property".
One way for agents to dodge this would be to put a lower price in the sales agreement but verbally quote a different figure to the vendor (a practice we have heard of occurring anecdotally) so that it's difficult to be found guilty of quoting a lower price to entice buyers. While this would still technically be seen as underquoting (as they may be called upon to justify why the estimate was "reasonable"), it makes the practice even harder to prove.
Without access to the sales agreement between the agent and the vendor – and a look at the original agreed-upon estimated selling price – it's more or less impossible for a buyer to prove the practice is occurring.
The other way underquoting may occur is if an agent rejects a genuine offer above the quoted price and doesn't quote the new higher price to other potential buyers, which the agent is required to do (though update timeframes vary depending on the state). While this rule provides consumers with some protection, it's given rise to what is called 'step quoting' – where agents initially quote low and gradually keep increasing the price throughout the campaign as their estimate changes.
How much of a problem is it?
Laws against underquoting do exist, but they don't seem to have stopped the practice. Under Australian Consumer Law, it's unlawful to make false or misleading representations in relation to price. Some states have gone even further and introduced specific rules to combat underquoting, mostly targeted at the way property prices are advertised by agents. According to Morrell, however, underquoting is still rife. He offers up the statistic of nine in 10 properties being underquoted, but in reality, it's difficult to know just how common it is. Without access to the sales agreement between the agent and the vendor – and a look at the original agreed-upon estimated selling price – it's more or less impossible for a buyer to prove the practice is occurring.
Consumer Affairs Victoria (CAV), which has exercised the power to access these documents, recently investigated the issue of underquoting by looking at 200 properties on the market between 2015 and 2016. What they found validates concerns buyers may have about underquoting: while 27% of the 176 properties that sold during the investigation sold within the agent's estimated selling price, 53% sold by up to 10% more than the estimated selling price and 33% sold for more than 10% of the estimated selling price. As a result, CAV has 13 investigations under way.
Complaints statistics tell a similar story. In Victoria there was a marked increase in complaints relating to underquoting in 2015-16, with 339 complaints – up 114% from 158 in 2014-15. Such increases were similar in NSW, jumping from 84 in 2014 to 236 in 2015.
What's interesting is that while new laws designed to crack down on underquoting came into force in NSW at the beginning of 2016, they haven't done much to get rid of the problem. Complaints received by NSW Fair Trading in 2016 remained fairly steady at 227 (as of October 31) compared with 236 in 2015 (for the full year).
NSW Fair Trading attributes the lack of decline in complaints to "increased awareness and the topical nature of underquoting", rather than a failure for the new laws to work. Time will tell, although the results from our spot check would suggest the news laws haven't solved all problems relating to real estate pricing in NSW.
What we found
To examine the current state of affairs, we did a spot check of a random selection of properties – a mixture of 52 apartments and houses in both Sydney and Melbourne (predominantly in the inner city areas with a few outliers). We found that:
- 52% sold for more than the maximum quoted price given by the agent (this was fairly similar in both Sydney and Melbourne)
- 25% (13) sold by over 10% more than the maximum quoted price
- 27% (14) sold for up to 10% more than the maximum quoted price
- 8% (4) sold for either less than, or within the quoted price range
- 40% (21) didn't sell or didn't disclose the sale price
The most flagrant discrepancy was a property in Sydney's inner west with a price guide of $1.6m which subsequently sold for $2.2m (38% more than the quoted price). Other questionable examples included the six properties that were passed in at auction and up for sale at prices higher than those quoted throughout the campaign.
In NSW and Victoria, if a genuine offer is given that is higher than the price quoted, the agent will need to update any online listing or advice given to buyers about the price estimate.
What are the laws?
The laws vary slightly from state to state (and some states and territories don't have anything specific – although misleading potential buyers about price is still prohibited under the ACL).
- When it comes to auctions, agents are banned from making any price guide representations at all to potential buyers.
- For properties for sale, if the phrase 'offers over' is used, the price should be the minimum amount the vendor is willing to accept.
NSW (since January 2016) and Victoria (expected to commence 2017)
- Words and symbols in advertising such as 'plus/+' and 'offers over' and 'offers above' are banned and if ranges are offered, they must be within a 10% range (eg. $600,000-$660,000).
- Agents must update the price estimates given to potential buyers throughout the campaign if the reasonable estimate changes. Say for example, a genuine offer is given that is higher than the price quoted, the agent will need to update any online listing or advice given to buyers about the price estimate. In Victoria, once the laws begin, this is expected to be within one day, while in NSW this is more lenient – an agent should review and update selling prices weekly.
- In NSW, an agent has the option not to provide a price guide at all, while in Victoria, agents will be required to provide an indicative selling price.
- Words or symbols such as 'plus/+' or 'mid 400s' can't be used with a single price, but ranges are OK.
- Agents can't change the estimated selling price on the agreement once it's set. In addition, the final reserve set for the auction can't be more than 10% above than the estimated selling price in the sales' agreement.
Are the new laws working?
Penalties for breaching the new and proposed laws sound tough – fines up to $22,000 in NSW and more than $30,000 in Victoria, along with the potential for the agent to lose their commission from the sale.
Morrell doesn't believe the new laws are aggressive enough, or that they will solve the problem, because at the end of the day you have to get caught. Evidence of underquoting can only be found by consumer affairs agencies, as they have powers to examine sales documents. This means compliance with the new laws will be heavily reliant on consumer affairs agencies conducting enforcement activities. So how then do we stop underquoting? Morrell suggests taking real estate licences off offenders would do the trick.
What can you do, as a buyer?
- Don't trust the agent's valuation. Do your own research by comparing comparable sales to determine what you think the value of the property is.
- Valuation sites can help provide a guide – realAs, which was started by David Morrell, is one site providing crowd-funded valuations for buyers (with the help of a predictive algorithm developed by RMIT University).
- Know your limit and stick to it.
- Think you've been underquoted? Report it to your local consumer affairs agency.