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How To Buy An Investment Property - Articles

How to Beat Agents at the Underquoting Game

Date: 21/01/2016

Agent underquoting has been in the media spotlight of late as both Victoria and New South Wales regulators have been cracking down on the practice.

Underquoting is the misleading of a prospective buyer regarding the likely sales price of a property. It happens when an agent advertises a property or quotes a price they know to be below what the vendor is willing to consider in a genuine offer.

price of a propertyIt’s most often in a hot market that buyers will complain about deceptive agents. In light of the auction clearance rates above 70 and 80 percent in Melbourne and Sydney last year, it’s no surprise that consumer complaints of underquoting have surged in numbers.

In a rising market, where buyers are aggressively competing for fewer available properties, it’s common that homes will sell for considerably more than an agent originally quotes. Simply comparing the initial advertised price with the final sale price is not sufficient evidence of underquoting.

Nonetheless, regulators enact laws against underquoting in hopes of leveling the playing field for all buyers. When lured to properties that they never could ultimately afford, buyers complain that agents are wasting their time and money on inspections and leading them into personal disappointment.

Consumer Affairs Victoria Minister, Jane Garrett, agrees and has responded with force. She recently ordered 200 comprehensive surprise inspections of real estate agencies across the state. Several prosecutions are currently underway, and if history is a guide, some Victoria agents may soon get hit with some big fines.

In New South Wales, there haven’t been any successful prosecutions related to underquoting since 2002 when they originally established laws to protect buyers, but new legislation has recently gone into effect that could change all that.

New Underquoting Laws

Here’s a summary of the new regulations in New South Wales:

  • Agents must provide an estimated selling price to the vendor.
  • Agents must update their estimate if it is no longer reasonable.
  • Agents must never advertise or make representations to buyers that are less than this estimate.
  • 10 percent of the lower rangeVague pricing language is not allowed anymore, such as“ offers over/above,” “bidding from,” “mid $3 millions” or “$2 million plus.”
  • The upper end of a price range quote must be within 10 percent of the lower range; for example, “$700,000 to 770,000.”
  • Buyers must be allowed access to records of comparable sales.
  • Every conversation that an agent has with a prospective buyer about the property’s estimated selling price must be recorded in detail.

Why Do Agents Underquote?

The most obvious reason agents underquote is to encourage more prospective buyers to look at a property. A common mentality, especially amongst old school agents is, “Quote it low, watch it go – quote it high, watch it die.”

It’s important to understand agents are salespeople and incentivised by a commission. They get paid to bring sellers and buyers together. To make money, they obviously need both a buyer and a seller.

In order to gain sellers, agents must first attract listings. After speaking with several agents, a seller will tend to list a property with the agent who suggests they can achieve the highest selling price. This may lead an agent to overestimate the potential sales price to the vendor.

agentIf the agent has been overly optimistic in their appraisal to the seller, they will not want to quote the same price to prospective buyers in fear of scaring them off. As the saying goes, “Quote too high, watch it die.”

As offers come in, the agent then needs to gently massage the seller’s expectations to bring them back into reality. If they can’t get the vendor to accept an offer, they’ll never get paid.

Even if the seller’s reserve price is realistic, the agent needs as much interest as possible in the property. On auction day, the more bidders who are present, the greater the likelihood the agent will meet the reserve and achieve the sale. This is why the reserve price is unpublished in the first place, and also why underquoting is a reality of the industry.

Like it or not, the system inherently motivates agents to underquote. Regardless of whether a buyer can afford the reserve price, the more hungrier bidders present to warm the auction up with lower bids, the greater the likelihood of the agent getting the sale.

Why You Need to Make Your Own Decision of What a Property is Worth

Armed with this understanding, how do you beat agents at their own game? Most importantly, don’t leave it up to the regulators to protect you. Take responsibility for knowing the market well enough to identify underquoting when  you see it. This will help you to avoid wasting time inspecting or bidding on properties that you can’t afford.

Carry out your own research of prices in the area. Ask the agent to provide you with comparable sales to justify the price range. Recognise that in a seller’s market, you may be outbid, and the ultimate sales price may be higher than the agent originally anticipated.

personal residenceIf you research prices and make your own decision regarding a property’s value, and then decide on a maximum price you are willing to pay, you can eliminate your emotion and guesswork.

Of course, this is easier said than done when buying a personal residence because it’s a lifestyle asset and often an emotional purchase, but for property investors, there is no excuse for failing to carry out due diligence and relying exclusively on the opinion of an agent.

You may also find it helpful to ask an agent for a price representation in writing. If the agent has to sign their name to a price range, they will be much more likely to shoot you straight.

Conclusion

In Steve McKnight’s Property Apprenticeship course, we equip investors to take responsibility for their own investing success. The entire third module of the course is dedicated to topics related to the analysis, buying and financing of real estate.

Steve explains in detail how to deal effectively with agents and conduct thorough due diligence. You can learn more about our training options here: https://www.propertyinvesting.com/store/property-apprentice/.

Profile photo of Jason Staggers

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.

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