Legally underquoting? How agents get away with it
Catherine Cashmore writes for Property Observer on the issue of underquoting.. how do agents get away with it?
Anyone in who has searched though one of the online real estate websites recently, will understand the frustration experienced when price quotes are missing – and judging from Australia’s real estate obsession, it’s no meaningless amount. The REA group alone claim to get “8.8 million unique visitors each month”.
Putting a price on real estate, particularly with homes offered as private treaty, is not difficult.
Ideally, an assessment of the property is undertaken by the sales agent – one familiar with market sales in the immediate locality – and in conjunction with the vendor, a price is set that produces a happy balance between both vendor expectation and local comparable sales.
If interest is lagging in the two weeks following, the agent can negotiate with the vendor to reduce the range.
If sales enquiry is healthy – or an offer in excess of the range is achieved and subsequently rejected – the agent has the ability and ethical responsibility (in conjunction with their vendor) to change the quoted range to reflect the heightened level of interest.
For a proportion of agents acting within their “reasonable” duty of service, this still is the norm.
However, now it seems every second advertisement you click upon, whether auction or private treaty has “contact agent” or a similar term listed underneath the subheading “price”.
An enquiry then produces a roundabout of guessing games with somewhat wishy-washy lines totted out, such as “it’s too early to tell”.
In other words, the agent is indicating he has no idea where to place his price quote, because Joe Blogs buyer hasn’t yet walked through and in some occurrence of pure fiction, stopped to tell the agent exactly what he’s prepared to offer.
Whilst we all agree –in a free market - real estate can only be valued on what a willing buyer is prepared to pay; this is precisely why real estate agents appraise a property against recent comparable market sales in the first place.
When combined with good local knowledge, a market appraisal (not to be confused with a valuation,) will give the agent a very good indication of buyer demand – at least to the degree of being able to publish a negotiable price range that falls in line with vendor expectation at the outset.
I should pre-empt before going further that a proportion of agents I speak to will give me a realistic idea of vendor expectation upon enquiry – however, after years of complaints within the industry regarding those who still choose to lowball their ranges, or quote using a ‘plus’ price, (which in today’s terms, can mean anything from 5-30%) – there continues to be an overall lack of transparency within the sector, allowing a number of agencies (particularly when advertising for auction) to continue selling buyers “false hope” with no fear of reprimand.
To give an example, I recently attended an auction in the Balwyn High School zone. The property was quoted at $700,000 plus, and later revised to $750,000 plus in the final week of the campaign.
A call to the agent indicated vendor expectation was “very reasonable,” they “hoped” to get over $800,000 I was told, but “who knows?”
The comparable data told a different story. A price in excess of $850,000 should have been expected. This selling agent – (an expert in the area) – would have known this, and the auction merely confirmed it.
The opening bid was $800,000 - $50,000 above the price quote.
The property did not reach its reserve until $900,000 - $150,000 above the price quote.
With competition from seven bidders, it finally sold for $1,011,000 – but not before a neighbour I’d been casually chatting to, leaned across and revealed the ‘wish’ price, when she whispered: “I know the vendor, and she wants a million.”
It’s time we valued the ethical side of our sales industry with a little more seriousness than pricing an item on e-bay – with a “quote ‘em low, watch ‘em go” mantra.
The continual problem with different methods of quoting – or lack thereof – runs to the very base of mistrust most buyers have against the real estate industry as a whole - and it’s a brush that tars us all.
It’s time vendors were required to take shared responsibility with the agency for their own paid advertising campaigns and ensured their reserves are published at the outset.
Even in a buoyant market, recent data will give a good pinpoint of expectation for the agent to advise their vendor’s of an appropriate reserve at the outset – should market forces take over once the property has reached that reserve, so be it – it doesn’t change what should be a simple exercise.
It seems silly to point out the obvious, but no buyer likes to play guessing games when it comes to putting a price on an advertised listing – and neither should they have to.
Everyone understands real estate is a negotiated asset, however, the verbal game playing that now surrounds the sales industry is often laughable – ranging from “we don’t know yet” to “properties in the area are selling in the $400,000 and $500,000 range” – information a simple internet search could reveal.
When an enquiry is made regarding price, the one bit of information buyers require, is an accurate ‘ball park’ indication of vendor expectation.
Whether it’s too high, or at a reasonable level for market demand doesn’t matter – the vendor is signing the contract and therefore interested buyers need evaluate if it falls in line with their own budget constraints.
As for an assessment of value - if we were operating in an ideal world, buyers would ignore price quotes altogether and do their own research to establish market value, prior to spending hundreds on a pest and building inspections or solicitor fees chasing an unobtainable dream. However, despite recent improvements, closely comparable sales data is not always readily available. In Victoria, many are still listed with undisclosed prices.
Computer-generated “estimates,” are just that - and more often than not, hopelessly inaccurate at providing the depth of information buyers require for effective negotiation.
Suburb reports are equally unhelpful, and while median data will give a clue of the dollars the majority market is spending, they are no help when evaluating individual property prices.
Using a buyer agent who has access to such information is all well and good – however, agents should not have a monopoly on data, and it’s reasonable to suggest buyers deserve a “hint” of vendor expectation by way of an accurate price quote before wasting time and money chasing a dream.
A handful of agencies dealing with the more volatile luxury end of the market, in which interest is discretionary, understandably choose to sell via ‘expressions of interest’. However, the decision to drop the quoted range all together, from a large percentage of real estate advertisements seems, in a good number of cases, to have been employed as “self-protection” from accusations of “underquoting” – a policy designed to protect the sales agent – and not one that’s necessarily in the best interests of their client.
Vendor expectation can often be inflated. It’s made worst by the commission-based competition between real estate agents and their respective agencies – which can promote the need to “buy” a listing through selling false hope, or risk missing out to a competitor who promises they can achieve more.
Quoting low ‘legally’ is not difficult. In Victoria – which has fallen under more scrutiny that any other state - if the vendor does not disclose the reserve on the sales authority when assigning their listing to an agent, (which is the general practice and advised by most) the quote does not need to reflect vendor expectation.
Instead, an agent must provide a written estimate of market value, which if a range, should be no more than a 10%. This range is theoretically based on comparable data, but finding near by results to establish a lower price is not difficult - should that be the intention.
For example, in the story I highlighted above – comparables on nearby streets outside the schools catchment area would have placed the listing closer to the quoted range.
Similar applies within the suburb - if you’re not familiar with the good and bad streets, which attract different levels of demand, the price differences can be stark.
Albeit only by quoting below the agents written estimate of market value on the authority is officially “underquoting”. Therefore, under current legislation, the written estimate does not necessarily need to reflect vendor expectation.
It may not be admitted as such, but when agents list a property it is common practice to encourage the vendor to withhold their reserve price. This enables a conservative estimate of value – as either a verbal or published quote range – to glean as much buyer enquiry as possible.
Once again I stress, that each agent has different ethics. I am talking generally across the industry – and unfortunately, there is enough evidence of the above practices to pollute an overall impression of the whole.
Furthermore, if one agent quotes low, and another in the same suburb quotes at a level more reflective of reality – guess which listing gathers the greatest enquiry? A catch- 22 for agents working to turn over business, in a very competitive commission based sector.
The only time an agent is required to adjust the range higher, is if a written offer in excess of the published figure is received. However, what typically happens in this scenario, is the number – (should there be one) – is removed altogether.
The above process of ‘quoting low,’ is sold to the vendor via an explanation of the “buyer pyramid” – it works a little like step quoting – get the lower priced bidders to build momentum during the auction, to fuel those bidding with healthier bank accounts to step in at the end.
In this scenario, during which emotions are strong, buyers tend to bid to win, rather than bid to buy. In a heated market, rational thinking is generally not employed, especially when competition is fierce and ‘fear of missing out’ ensues.
Without the lower budget bidders, auctions can pull up short lacking the usual frenzy that has - in our boom eras of growth - significantly contributed to pushing medians to unsustainable levels and exacerbating upward swings in the market cycle.
Furthermore, any gaping hole between the quote and reserve can be waved off with the excuse that the vendor ‘changed their mind’ – or ‘upped’ expectation. Hence why it is so easy to get away with purposefully placing the price range below the level at which the vendor will sell – and when that quote is verbal, it’s arguably easier still.
To suggest that a property owner’s expectations fluctuate to such an extent so as to not be represented in the price quote is highly questionable. Having worked as a sales agent in previous years, I can categorically say there was never a time where I didn’t know my vendor’s approximate reserve well enough in advance of the auction, to place a reasonable quoted range on a listing from day one.
Furthermore, vendors are not without blame. Assuming the price quote is a estimate based on “recent comparable sales” and the vendor isn’t in the dark when it comes to the price quoted on his or her vendor-paid advertising, why would he or she agree to list the property and quote at a level they would not be willing to sell for in the first place?
In such instances, I would suggest this is a pretty good example of what should officially be termed “underquoting” – conservative at best, deceitful at worst.
There are many solutions to this puzzle, which would not be difficult to legislate.
Some states have suggested banning quotes altogether – either verbal or otherwise - but this does not take us closer to an effective solution for buyers. Additionally, it makes it very hard for a good sales agent to interact with buyers to enable them to modify their vendor’s expectation as the campaign progresses.
With this in mind, I would suggest, it’s time vendors were required to take shared responsibility (with the agency) for their own paid advertising campaigns and ensured their reserves – or ranges in which they’re prepared to negotiate within – are published at the outset and provide an accurate indication of a price they are willing to consider.
If minds are changed, quotes should be changed, but leaving such a large question mark for buyers, who are increasingly frustrated at having their time, money, and energy wasted, is damaging for all concerned.
Follow Catherine on Twitter or via her Blog.