House prices are in the end set by the market. But who sets them in the beginning.
10/01/2012 
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House prices are defying gravity as lower affordability pushes many would-be homeowners aside. So if the average first home buyer is missing out, who is doing the buying?
As buyers miss out on properties that sell for far more than the advertised quote, the question needs to be asked whether this is the result of underquoting or a hectic market. By Karin Derkley.
It seems the ‘silly season’ is back in the property market, with properties often selling for hundreds of thousands of dollars more than their advertised prices. It raises the question as to whether agents are again indulging in the outlawed practice of underquoting?
In March, a Hawthorn property advertised with an estimated selling price of $820,000 sold for $1.38 million – a mark-up of nearly 70 per cent. At the lower end it’s just as bad. A Thornbury property advertised at $420,000 sold for $583,000 – nearly 40 per cent higher than the advertised price. Another in Barkly Street, Brunswick, sold for $810,000, more than half again its advertised price of $530,000.
Buyer’s advocate David Morrell says agents have underquoted on as many as 80 per cent of recent sales – even though state and federal laws prohibit it.
The price blow-outs devastate buyers, especially those looking for their first home struggling in an unaffordable market, he says.
“Agents just don’t understand the angst it is causing,” he says. “People are ending up in tears after the first bid has completely blown them out of the water.”
He describes underquoting as “bait advertising”.
“They’re just trying to encourage more people to come along to the auction – but it’s such a destructive practice in the industry. Buyers are spending money on building inspections and bringing along their parents to the auction thinking they’ve got a chance. But in the end they’re just the bridesmaid.”
Hocking Stuart managing director Greg Hocking agrees underquoting is still an issue.
“Even our own guys have been known to be a bit colourful on the quote – although we’re addressing that in the firm,” he says. But Mr Hocking says it is an issue clouded by the market’s strength. “It’s become a lot more difficult for agents to accurately predict the height to which prices are being pushed.”
He cites a property advertised by another agent recently at $4.5 million: “I thought that was rather an optimistic quote. But then in the auction it ended up selling for $5.6 million. We were as surprised as anyone.”
Fletchers Real Estate director Tim Fletcher also concedes that some agents are fudging the figures on the likely outcome of auctions. But, he also suggests that in some cases, even the listing agents are surprised at the prices properties are commanding in an extraordinarily buoyant market.
“We sold a property recently in Elgar Road that we had advertised for $540,000,” he says. “We ended up getting $740,000 and we were shaking our heads in disbelief. There was no way we could have anticipated that.”
Mr Hocking says it is difficult for an agent to anticipate the selling price at the start of a four-week marketing campaign. And listing at a higher price may kill interest at the outset.
“You can’t always assume that a property is going to sell well just because others nearby have,” he says.
“Every property is unique, and an over-cooked quote can destroy all the marketing work on behalf of a vendor.”
Buyer’s advocate Bruce Renowden agrees that it is not always the agent’s fault if prices run higher than advertised; with auction clearance rates up at 80 per cent, prices will overshoot.
“People need to understand that it is the market that affects the outcome, not the agent’s quote,” says Mr Renowden, who runs Don’t Get Hammered at Auction property buying services. “There are a lot of bidders who all want the same property. And it’s the buyers who are pushing up prices – not the agent.”
Many buyers, he adds, don’t grasp the nuances: “An auction is about throwing a property in front of the public and seeing how much they are prepared to pay for it.”
When a lot miss out, they complain the system is rigged, he says. “But you can’t afford to have that attitude as a buyer.”
He says they should study the market and expect prices to overshoot by at least a quarter.
Yet the Estate Agents Act says that the quoted price must be based on an estimate of the expected price the agent gives the vendor – either as a range (less than 15 per cent) or as a figure. That is based on what would be expected to be paid for the property by a “willing but not anxious buyer” in a normal market, says Real Estate Institute of Victoria CEO Enzo Raimondo. The reserve at which the vendor will sell does not have to be listed on the authority until just before the auction.
There is no requirement in the act that the quoted price must be within 10 per cent of the expected price, he adds, although complaints that reach Consumer Affairs are investigated if the sale price exceeds the quoted price by more than 10 per cent. “I think there is some confusion among the public in that regard,” he says. Mr Raimondo says there is no legal requirement that agents adjust the quote price unless they receive at least one written offer, with a 10 per cent deposit, that far exceeds the quote price. “Until the offer is in writing, there is no guarantee that the buyer is truly willing to pay that amount for the property.”
Others say an agent who gets many high verbal offers knows that it will sell for more.
Mr Hocking says, “If agents are receiving a volley of offers well above the advertised price it just stands to reason that the quote price should be adjusted; that’s where the agent should be using their professional judgement.”
Mr Raimondo agrees that adjusting the quote, reflecting expressions of interest, would be “best practice” but says there could be no recourse by disappointed buyers on the basis that the agent should have known the price would be higher given the market’s strength and interest in a property.
Mr Morrell counters that it is an agent’s business to know the market and adjust the quoted price accordingly: “That’s their job as professionals. “Everyone else knew the house in Hawthorn was going to go for more than $1 million, for instance, but they were still quoting it at $820,000 in the week before the auction.”
The vendor has to cop some blame – they set the reserve at which they will sell, even if it is with the advice of the agent. “Why are vendors letting agents advertise their property for $750,000 when they know full well that they are not prepared to sell for under $1 million?” says Mr Morrell.
WHAT BUYERS CAN DO
* Understand that it’s buyer interest that pushes up prices, not the selling agent.
* Accept that agents err on the side of conservatism with their pricing to ensure a big crowd of bidders.
* Research recent sales of comparable properties to get a more accurate idea of what a property is likely to sell for.
* Assume, but don’t expect, a 25 per cent mark-up on the advertised price. Sometimes a property sells for less than expected.
Rick Adlam has been helping clients with home loan finance since 1985 when he was home consultant with AV Jennings. Rick started Equity Home Loans in 1996 to help homeowners become property investors. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers.
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