Why Do Real Estate Agents Underquote Property Prices?
Ever been to an auction where the property sold for hundreds of thousands of dollars above what the agent had quoted?
I certainly have and I know many disappointed prospective buyers who have missed out at auction by being misled by agents’ quoted price ranges.
Just to make things clear…the practice of underquoting is where agents lure potential purchasers to look at a property (usually for sale by auction) with the suggestion that the property will sell for much less than they believe it will.
By law, property advertising must not be misleading or deceptive.
It is illegal for a seller or agent to misrepresent a property in any way when advertising or marketing that property, whether verbally or in writing and photographs.
However, it’s important to draw a distinction between underquoting (where the quoted price is far below the expected sale price and or auction reserve price) and a situation where competitive bidding results in a sales price way above the vendor’s reserve.
An auction is designed to extract the maximum price for a property by bringing a group of potential purchasers together in a competitive environment.
I’m often surprised how high an emotional buyer pushes up the price of a home in their eagerness for it.
So it’s not unreasonable to expect that agents occasionally get it wrong.
Why do agents underquote?
Years ago a favourite saying of many agents was:
“Quote it low, watch it go, quote it high, watch it die.”
While this may sum up why real estate agents used to underquote, over the last few years I’ve found more and more agents reluctant to underquote, in part not to fall foul of the tougher legislation that’s been introduced.
But this is what happens when agents meet prospective sellers…
An owner is thinking of selling so ask a number of agents to tell them what they think their property is worth.
And of course, vendors are inclined to “go with” the agent that “quotes” them the highest price.
If the agent has been a bit generous in their appraisal, they quote less during their marketing campaign in an effort to generate enough interest in the property to get close to the price the vendor hopes for.
All the while, they also manage the vendor’s price expectation down to an achievable level, quoting market feedback during the selling campaign.
It’s the real estate agent’s role to broker a deal between a vendor who naturally wants top dollar for their property and a buyer who doesn’t want to pay too much.
So during an auction campaign, the agent walks a tightrope not being able to disclose the vendor’s “real” reserve price while buyers, understandably, keep their cards close to their chest and do not honestly tell the agent how much they are prepared to pay for the property.
What are Auction Price Guides?
Real estate transactions are a state-based law, but in general selling, agents are prohibited from quoting below the vendor’s reserve price and the agent’s estimated selling range of the property.
Rather than disclosing a price, in some States, the selling agent advertises a price guide or range and sometimes amends this (usually up) during the auction marketing campaign.
How should buyers handle price guides?
- As a buyer, it’s important to be aware that underquoting takes place. I’m not justifying underquoting, but since it occurs, it makes sense to have a pragmatic approach to it.
- Do your own due diligence regarding the property’s value and the maximum you are prepared to pay. Search the Internet, attend auctions, speak with a variety of estate agents, and monitor auction results. See what the final selling price is and how it compared to the quoted price range before the auction.
- Be realistic – use the agent’s estimated selling price as a guide only, and realize the seller is unlikely to set their auction reserve price (which might be above the advertised price) until the day of the auction. If the agent is quoting significantly less than what you believe the property is worth, ask the agent to justify their advertised price. Maybe this is a good property to make a strong pre-auction offer on.
- Level the playing field – consider engaging the services of independent buyer’s agents.
These professionals have access to sales data and are able to analyse and interpret the information correctly.
A good buyer’s agent can also assist in the negotiation process or bid at the auction for you.
They may also be able to use their professional relationship with the selling agent to peek behind the curtain and find out what price the vendor really wants and what other potential purchasers may be prepared to offer.
Buying a property at auction brings out the best and worst of our emotions.
Be prepared and understand what’s going on in order to take part without getting hurt.
