3 months ago
19
When Garry and Kerrie Connell first listed their penthouse for sale they were told it could fetch more than $8 million, but went to market with a conservative price guide of $6.5 million to $7 million.
It was a quality apartment in the blue-chip Sydney neighbourhood of Paddington, in one of the most bullish property markets in the world. What could go wrong?
Three auction campaigns, two price guide reductions and one new agent later, their agent strongly advised they accept an offer of $4.8 million.
Thus, when Garry Connell says underquoting has the potential to hurt sellers, he speaks from experience.
Garry and Kerry Connell are smiling after not bowing to pressure to sell their penthouse for less.Credit: Edwina Pickles
“In hindsight, the buyers who offered $4.8 million must have thought we’d be delighted because they had offered well above the guide, but the reality was it was more than $2 million less than we were originally told it was worth,” he said.
Their experience illustrates how it is not just buyers who feel the pain of underquoting. Many homeowners in NSW and Victoria are paying the price as the illegal practice taints their sale campaigns, wiping hundreds of thousands of dollars off the value of their homes.
Loading
In the latest instalment of the Bidding Blind investigation, agents and property experts detail how underquoting - instead of stimulating demand - stings sellers by piling pressure on them to reduce their asking price, thereby ceding their negotiation power and undervaluing their property.
“Sometimes the underquoting is so extreme that the agent anchors the value too low, leaving an impossible gap to bridge,” said real estate agent Ben Collier, of The Agency.
The risk that an underquoted campaign will backfire is heightened during softer real estate markets.
“What we’re seeing in Victoria [broad brush] is that the buyers aren’t chasing the vendors expectations, so the underquoting is not working,” said Melbourne’s buyers’ advocate David Morrell, a director at Morrell and Koren. “The gap is too far.”
The debate about tackling underquoting in Australia’s two largest cities is at a critical moment.
New laws announced in Victoria last month will force agents to disclose a home’s reserve price well before buyers attend the auction. But that landmark change faces industry resistance amid claims it could disadvantage sellers.
Victoria is facing the biggest shakeup of property price rules in decades.Credit: Peter Rae
The NSW Office of Fair Trading has largely dismissed pre-auction reserve disclosure, as it considers different reforms including mandated published price guides, steeper penalties and more detailed price estimates.
Melbourne real estate agent Craig Frost said people did not understand the damage underquoting did to sellers.
“I’ve had people in my office crying and saying, ‘I’ve got tricked. I got duped by that agent. Can I get out of that contract? Can you give me some advice?’, but it’s too late,” he said.
Underquoting - a practice whereby agents deliberately provide a low sale estimate for a property to attract a crowd - creates a gap between the price expectations of the seller and buyers.
While buyers have the option of not pursuing an underquoted property, sellers can find themselves trapped, said buyer’s agent Stuart Jones, of Jones Property Advisory.
Loading
“Vendors have more to lose because by the time they realise an agent is underquoting their property they are usually locked in to an agency agreement with that agent,” he said.
Not helping is the increasingly competitive pricing among agents.
“A decade ago there was a 10 per cent range between the best-case and worst-case scenario in terms of sale price. Homeowners could do their sums on what they might buy based on that,” Collier said. “But now that range is 25 to 30 per cent.”
For Garry and Kerrie Connell, there was a 35 per cent gap between their best post-auction offer of $4.8 million and the conservative value estimate of $6.5 million.
The idea behind the underquoted price was, Connell was told, to get as many people through the penthouse as possible so that come auction night people would fight over it and push the price back up.
It certainly pulled plenty of buyers, but none who were willing to pay millions of dollars more than the guide. Instead, the discounted guide had just lowered its value.
“Underquoting really just dilutes genuine competition,” said buyer’s agent and founder of SydneySlice Deborah West.
“As a seller, if you haven’t got the right buyers in the room on auction day, and you are under pressure to sell, then you’re doomed because you’re unlikely to meet reserve,” West said.
Failed underquoting campaigns are frequently exposed when homes pass in at auction even though bidding has exceeded the advertised range.
Almost 50 people who responded to this masthead’s survey about misleading price guides cited first-hand experience at auctions where this had occurred.
In 17 of these cases, they were the highest bidder, only to miss out because the owner wanted more than the agent had advised.
For buyers lured to an auction on the promise of a bogus guide, the cost can be significant: lost weekends inspecting the wrong properties and money unnecessarily spent on building, pest and legal advice.
But when homes pass in well below their reserve, it’s the seller who has the most to lose, warned Craig Frost.
“You’ve lost every bit of leverage in the negotiation,” he said.
Craig Frost, a real estate agent in Melbourne’s outer north, is passionately opposed to underquoting, and says it’s leaving vendors worse off. Credit: Jason South
The Wallan-based agent cited a very recent example where the seller would have been better off if their property was listed for the price they wanted, rather than a range that suggested they would accept less.
The house for sale was a three-bedroom home near the regional town of Gisborne. The guide was $1.23 million to $1.35 million.
Frost was assisting buyers who loved the property and were willing to pay top of the range, but when the house passed in at $1.25 million to a sole bidder, Frost said they had no reason to meet the owner’s $1.35 million reserve.
“People can now go hang on, that was advertised at as little as $1.23 million and didn’t sell, and now they’re asking $1.35 million,” he said.
“You’re up against it before you start, and that’s going to cost you money as a vendor, without a doubt.”
Following the failed auction, Frost was able to negotiate a $1,295,000 sale, with thousands of dollars of equipment and furniture thrown in.
The vendor, meanwhile, was forced to settle for a result below what they had paid for the three-bedroom house more than two years earlier.
Jenni Tonner, the NSW president of the Australian Institute of Conveyancers, said while she welcomed the NSW government’s proposed reforms, which follow in Victoria’s footsteps by introducing mandatory price guides, she would like them to go a step further and introduce mandatory reserve disclosure.
Victoria will introduce that change next year, after last month announcing landmark Australian-first laws requiring agents to publish reserve prices at least seven days before auction day or fixed-date sale.
There is currently no proposal in NSW to mandate reserve price disclosure before auctions, despite industry leaders calling for more transparency.
A spokesperson for Fair Trading said the NSW model would go beyond Victoria’s current system by expanding disciplinary powers, including publicising the names of agents caught underquoting.
Another way underquoting hurts vendors is the impression left on the market once an agent has pitched a property at an underquoted price - it becomes harder to reclaim higher price hopes.
That’s because previous price guides leave a “digital footprint” on property portals, according to a slew of agents. That, in turn, effectively taints all future marketing campaigns.
Ray White Lower North Shore director Geoff Smith.Credit: Anna Kucera/Fairfax Media
Adding to the stigma that comes with an underquoted guide is a failed auction, said Ray White Lower North Shore’s Geoff Smith.
“Buyers can see that a property hasn’t sold, or that it was passed in at a set price,” Smith said.
“The market gets confused at that point, and unfortunately buyers don’t see it as a failure by the agent. It becomes the property that’s at fault, not the agent.”
Smith said another workaround by underquoting agents was to publish a guide that matched the agency agreement - as legally required - but to input a lower price guide on property websites so that it is included in the searches of buyers with a smaller budget.
“That’s just classic underquoting, and the owner is often not even aware of it,” Smith said.
Not even valuers, whose job is to provide unbiased assessments of a property’s worth, are immune to the impact of underquoting.
“Independent valuers who are experienced in a residential market will be able to discern the true value, but a valuer who relies on data alone is more likely to take a cookie-cutter approach to the valuation, and a big part of their information gathering will be the guide,” Jones said.
Connell knows it. After his third attempt to sell at auction failed, and with only a $4.8 million offer, he commissioned a valuation.
“The valuer put it at $4.3 million because, I’m sure, they saw it was listed with a $4.5 million guide and knew it had already been for sale for eight months,” Connell said.
Rather than take the offer, Connell signed a third agency agreement to sell his penthouse, this time with The Agency.
“Agents Ben [Collier] and Cathryn [Dudman] used what I call a rifle approach, which is targeted at a specific type of buyer, whereas the other agents had used a shotgun approach whereby you put it out there, pellets everywhere, and hope you hit something.”
It worked. Nine days later they had a couple of buyers at more than $6 million, and sold it for $6.5 million.
Melbourne-based vendor advocate Fahey Younger said underquoting “100 per cent” harmed those trying to sell their homes.
“As soon as there is a misrepresentation of value or expectation, then you’re starting off on the wrong foot,” said Younger, the director of Younger Hill Property Advocates.
“The agent’s trying to defend their bullshit, the vendor’s angry [because] they want more, and they’ve listed low … and the buyers don’t trust anybody.”
