What you need to know about real estate underquoting

Although the majority of Australian real estate agents act in good faith, it's crucial that you understand the marketing techniques that some agents may use to attract interest in a property and generate a larger pool of prospective buyers.

Sometimes referred to as "bait pricing", underquoting occurs where a real estate agent markets a property for less than the genuine sale price to attract greater interest from potential buyers.

Unfortunately, underquoting is a common practice within the Australian real estate industry. Recent data from realAs indicate that some agents in NSW and VIC underquote by 20-30%. Nearly 50% of participating agents in the 2014 Real Estate Business poll claimed it was a major issue within the industry.

What is real estate underquoting?

Real estate underquoting takes place when an agent knowingly advertises a property price that is less than the vendor is willing to accept as a genuine offer to boost the number of interested buyers.

Generally, an agent is said to be underquoting when they intentionally understate the estimated selling price of a property by making a statement that the property is less than their true estimate of the selling price. This practice is misleading and unethical because the advertised price must be one that the vendor is willing to consider and the price must also reflect market conditions.

What's the rationale behind underquoting?

The motive? To attract a larger number of buyers and to create a greater sense of competition for the property. Many agents believe that buyers will think that the large price variances are due to a heated property market and the competitive nature of auctions.

However, some argue that agents would be better off by quoting accurately to attract buyers who have the financial means to buy the property rather than those who are unable to afford the price range that the vendor desires.

How does it work?

Some of the agents who use this tactic will originally advertise a property at a low price to attract potential buyers and then gradually increase the price up until auction day or the proposed sale date. This is known as step-quoting.

Some real estate agents will also remove estimated sale prices from online advertisements and only provide a verbal guide to potential buyers, while others may claim they cannot forecast what a buyer will be prepared to pay on the day.

Why is it bad?

Not only does real estate underquoting waste time and money, it also creates frustration amongst buyers who anticipate paying a certain price for a property only to be outbid or disappointed at auction.

Underquoting leads to a mistrust between buyers and agents as many buyers are unwilling to trust the agent's quoted price prior to the sale.

How can I protect myself?

When it comes to buying in a competitive market, it pays to do your homework. Here are some ways you can protect yourself from underquoting:

• Research comparable sales. Jump on to online resources such as realestate.com.au or Residex to access suburb profile reports that will detail the sale prices and action results of neighbouring properties. Make sure you only consider the data of comparable properties.
• Consult professionals. Strike up a conversation with real estate agents or buyers agents that aren't involved in the sale as they will be more likely to give you a true estimate of the price. Speak with other residents who are familiar with the area. You may want to consider using the services of a buyer's agent.

What should I do if I suspect an agent is underquoting?

If you believe that an agent has underquoted the estimated sale price, you need to be proactive and speak up.

Consult your local authority and file a complaint. When doing so, ensure that you have evidence to suggest that the agent has been reckless with their quoting, such as providing comparable sale prices.

What obligations does a real estate agent have?

Real estate agents have the following responsibilities when selling or marketing real estate:

• To make honest and reasonable estimates of sale prices
• To maintain records to demonstrate what information they used to reach estimates
• To maintain records of any conversations where estimates are adjusted

What is the true estimated selling price?

The genuine estimated selling price is the price that is documented in the agency agreement that represents the agent's true estimated selling price.

If a real estate agent advertises an estimated selling price in the agency agreement that is not consistent with their true estimate of the likely selling price for the property, then this may be considered false or misleading.

What are the common methods used to estimate the selling price?

When determining or reviewing an estimated sale price of a property, an agent should consider the following:

• Recent sales of comparable properties
• The vendor's expectations (reserve price and/or the price range they are willing to accept)
• Any recent valuations for the property
• Major features of the property (e.g. location and aspect)

Best practice when estimating a sales price

Typically, the seller's minimum expectation should be disclosed in writing before the marketing campaign commences. While each agency will have their own practices, certain information should be kept on file to reach genuine property sale estimates, such as:

• Recent comparable sales. This may include any changes in the market since the comparable property was sold or variations between the comparable property sale prices.
• Location factors. An agent should carefully consider average property prices in the area, supply and demand factors including days on market (DOM) and vacancy rates.
• Vendor expectations. The agent should include information regarding any specific instructions in regards to marketing campaign, preferred method of sale and the vendor's genuine price expectations.

Learn more about how to bid at auction

Price guides

When advertising a property for sale, the vendor must include specific price guides with a relatively low spread as price ranges provide strong signals to the market about the likely price at which a sale could be achieved.

For example, a price guide of "$650,000-$700,000" as opposed to "$650,000 and over" would be ideal because it provides a clearer indication of the vendor's expectations. When a price guide is provided, the lowest price in the range is generally considered to be the agent's representation of a realistic selling price.

Compliance and legislation

Regulating the compliance of underquoting is the responsibility of the consumer body in each state, such as NSW Fair Trading. However, it appears that existing legislation makes it difficult to determine whether underquoting has occurred. Currently, an agent can be found guilty of underquoting when there is sufficient evidence to suggest that they intentionally or recklessly providing a misleading sale price estimate.

However, new reforms in NSW now mean that real estate agents that underquote may not only lose their commission, but they may also face fines of up to $22,000. The new reforms will also make it easier to monitor compliance as agents will be required to maintain diligent record-keeping of conversations and methods of estimating the sale price. Advertisements that feature the terms "offers over" or "offers above" will be prohibited under the new regulations under the Property Stock and Business Act.

Under the new legislation, agents must quote prices within 10% of the lowest figure which will ensure that home buyers are not mislead to invest in property that is out of their price range.