Auction underquoting – what’s all the fuss about?

Two weeks ago the NSW State Government suddenly announced that they were doing something about agents underquoting auction price guides. Isn’t this great? Finally the buyers will know exactly what the sale price will be before they bid!! Right?

Call me cynical but the timing is interesting: I am of the belief that after the election the OFT will return to it’s previous state of disinterest.

In the meantime, however, they have decided to make an example of two agents at Bresic Whitney. These individuals aren’t the worst offenders in our experience and I certainly don’t think the instances they have been nabbed for are in any way extreme (not that we are justifying them!).

For the OFT to show they are serious they really need to go into every single agency in Sydney and review every single auction campaign.

Why do agents underquote?

There are three main players in this real estate game and they all have a part to play when it comes to auction price guides. The real estate agent, the vendor and the buyers. The OFT is meant to be protecting the rights of the two real estate consumer groups.

The first is the vendor and the old fashioned way to win a listing is to flatter a homeowner with an inflated appraisal on their property. Naive owner signs an agency agreement with the agent who can “get the highest price”. They then spend the rest of their auction campaign being “conditioned” by the agent to accept a lesser figure.

The second consumer is the buyer – or buyers – who decide they like the property and figure it is affordable based on the agent’s price guide. Naive buyer takes the agent’s quoting at face value and doesn’t factor in competition (or even recent comparable sales) and incurs costs (solicitor, building inspector, etc) without ever having a hope in hell of being the highest bidder.

Now, let me put it on the record that I do not believe all real estate agents operate in the way I have outlined above. In fact, I believe that they often walk a tightrope between a vendor who naturally wants top dollar for their property and a buyer who doesn’t want to pay too much.

Let me also say that most vendors and buyers are not naive. Most are reasonable people. But neither group is inclined to trust the agent, so the flow of information isn’t exactly free and open. And then there are also people at the other extreme who are not innocent bystanders in this whole business.

Some vendors are greedy. Some try to control the sales process and refuse to let the professional do their job. Some set their reserve way higher than advised by their agent.

And then there are the buyers who understandably keep their cards close to their chest. When was the last time you heard a buyer honestly tell an agent how much they were prepared to pay for a property? So in the absence of honest price feedback from buyers, agents are forced to play a guessing game.

Quote it low, watch it go, quote it high, watch it die.

Fundamentally the quoted price guide is a tool agents use to get reactions from buyers.

If they quote it low they will issue loads of contracts and get lots of offers. In fact, there is provision within the legislation to cover this – the agent needs to adjust their quoting throughout the campaign to take account of buyer interest and cannot quote less than an offer that has rejected by the vendor. But there are ways around this and numerous interpretations of what is a reasonable variance in terms of quoted prices.

If they quote it “just right” they will offer a respectable number of contracts and won’t have to field a rash of offers. But what is “just right”? Because buyers expect agents to underquote, common folklore has it that 10% below what they really want is the rule (rightly or wrongly). So, if a buyer factors in the buffer and thinks “that sounds about right”, the agent has targeted the right people.

But if they quote it too high they run the risk of generating no buyer interest. “Too high” can be what they really think it is worth. If buyers add 10% to that, they think “no way am I going to compete over that level” and as a consequence they discount that property.

There are plenty of agents who do their best to navigate an imperfect system, quoting at the lower end of what is reasonable in order to generate enough competition to deliver a good result for their vendor.

But there are also cynical agents who blatantly and shamelessly underquote, who find and use loopholes within the system. For example, there are agents who actively discourage offers so that they can avoid increasing their quoting throughout a campaign. I have heard of other agents getting their vendor to provide them with a low written reserve at the beginning of the campaign (which they assure their client will be torn up so a higher one can be given to the auctioneer on the auction day) so that they can demonstrate “accurate” quoting.

What’s the solution?

You can’t expect players in this game to suddenly trust each other and communicate openly and honestly. My personal belief is that the sales agent should be required to do the following:

  1. Publish the amount they put on the agency agreement as the price guide. For example: $750,000 to $800,000.
  2. If they receive written offers in the course of the campaign that the vendor rejects, then the published amount is adjusted to reflect that. For example: $815,000+.

Beyond that, I am not sure what else can be done without destroying the very essence of the auction system. We can’t legislate to make property owners set realistic reserve prices. Nor can we expect buyers to tell agents in advance what they are prepared to pay for a property. The best we can expect is that the professionals in this equation are obliged to be transparent and give both vendors and buyers the same information so that they can make their own informed decisions.

Further reading:

Guide to understanding real estate auction underquoting laws

What does auction price guide mean?

How to decode auction price guides to get a competitive edge

First published:-   19th March, 2015


Please note:

Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.

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