Underquoting: Who does it help?

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Every weekend prospective buyers are walking away from auctions shaking their heads, and sometimes their fists at Real Estate Agents. The same story is heard over and over again. The agent said the “buyer interest” was around $450,000 or “we are telling people who have interest around $500,000 that they should look at this property”. Then the property sells for $625,000 or even worse it passes in at $625,000.

Why isn’t the government, Consumer Affairs Victoria (CAV), doing anything about this? The answer is simply: It is not against the law! Only 2 or 3 agents have actually been caught underquoting. So CAV won’t spend many dollars chasing something that is not an ongoing concern.

So we have to assume that the real estate agents are grossly inept, or they are circumventing the underquoting laws. THE VAST MAJORITY OF REAL ESTATE AGENTS IN MELBOURNE ARE FAR FROM INEPT. When an agent first visits a prospective vendor at a listing presentation they talk about how much over market value they will achieve if they use their services. They would talk about how they are going to get them close to $650,000 for their property that is actually going to sell at about $600,000 – $625,000. They will tell the prospective vendor all the reasons why they should list their property with them.

Once they have convinced the vendor to sign an authority they explain that because of the way the market perceives quote ranges they must quote extremely low in order to get prospective purchasers to come to the open for inspections. So even when they have told the vendor they should be able to achieve $650,000, they will appraise the property at $450,000 – $490,000. The space for vendors’ reserve price on the authority is marked TBA (to be advised). The law is extremely clear when it comes to underquoting. If the vendors reserve is known (it is written on the authority), the agent cannot quote beneath this number. If it is not, then the agent cannot advertise the price below their appraised value.

Whilst everyone complains about this phenomenon, why do the agents bother? There are two answers to this. Selling agents believe that if they quote too close to what the property will end up selling for then many prospective buyers will not even come and look at the property. This means they do not get prospective purchasers contact details and they do not get the opportunity to try and list the prospective purchasers’ property. The life blood of a real estate agent is his or her next listing. The more people through an open for inspection the more chance they have of getting to another listing presentation.

The second reason being that most purchasers will spend over what set out to spend. If the agent can get a purchaser excited by a home, even though it is above their budget they may come to the auction and bid a little more than they intended to. This is not designed to help the purchaser in any way. It is designed to help the auctioneer get someone else to bid a little higher. The oldest rule in the auctioneering handbook “don’t have an auction with only one bidder!”

There is also another reason to get as many people as possible to the auction. And that is so the agent can convince the vendor that the marketing campaign has done its job. And if 100 people say your property is only worth $550,000 because that is the highest bid, then that is what you, as a seller, should accept. Suffice to say the crowd is full of people who expected to pay $450k – $550k not $550 – $650k.

So who does underquoting help? It does not seem to assist the purchasers. It does not seem to assist the vendors. Perhaps Consumer Affairs Victoria should actually look into who it does assist.

Ian James
Director
JPP Buyer Advocates

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About the author

Ian has been operating his own businesses for more than 25 years. During this time the self taught lessons of building the business, dealing with staff, suppliers, clients and economic woes have been invaluable. Ian is a fully licensed Real estate Agent, a member of the REIV and registered with the Business Licensing Authority.

Buying property is not just sticking up your hand and outbidding your rival. It is an emotional, fiscal and psychological decision that needs to be planned and well executed. Ian is usually involved in over three hundred property negotiations per year; ranging from the $250,000 first unit purchase for a young couple to multiple million dollar residential developments. Ian's business background and endless numbers of negotiations make him one of the industry's leading negotiators.

Ian is married with two adult children, living in Patterson Lakes. He is a keen fisherman when weather and business allows the time.

2 comments on “Underquoting: Who does it help?”

  1. Fletch Reply

    The same could be said about buyer advocates, every time we have an advocate bid to buy on behalf of a buyer they generally pay above market value-
    What a conflict it. Is to have an advocate get paid on the purchase- they generally over inflate value as to prep there purchaser for sale-
    They only get paid if the purchaser buys- doesn’t seem fair to me and maybe CAV should investigate over quoting–

    • Ian James Reply

      It is very true that some Buying agents may over inflate prices due to inexperience and the morally corruptible may inflate prices for their own benefits as they are paid a percentage of the final price.
      The obvious solution to this is to have set fees where the price the purchaser pays does not affect the commission paid. This adds incentive for me to get the property as cheap as possible. The cheaper I can get the property the more likely my client will be able to purchase. It also should be noted that good buying agents, like good selling agents substantiate their opinions in writing to their respective clients.

      It is not the majority of buying and selling agents that bring the industry into disrepute. It is those who live on the periphery. It is those whose moral compass is skewed. It is those we need to reign in.
      Your points are valid and I hope CAV and perhaps the REIV can help steer the industry a little better than where it is going at the moment.

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