If you are new to Aussie property market, the term “underquoting” may not make sense to you. Recently there were talks in the media about a new law applying to real estate advertising that will help reduce underquoting, and quite a few people asked me questions about underquotuing through email, so I thought that an explanation would be helpful.
What is underquoting in the context of property market?
In a nutshell, when a house with a fair market price of $570,000 is advertised with a price range of $510,000 – 530,000, that is underquoting. It’s a well-known technique real estate agents use to get a lot of people interested in the property, they specify a significantly lower price-range knowing that the property will sell for much more.
Why is underquoting good for estate agents?
The more people come to inspect the property, the better chance there is that two (or more) of them will get interested and then, even if the property is to be sold via private sale, the agent can make a silent auction out of it.
As soon as one person will make an offer on the property, the agent will ring the other interested buyers and will suggest that they make a better offer. Once a better offer is made, again the agent will ring all the others and suggest that they make an even better offer. It looks and feels just like a real auction with the exception that you don’t see who bids against you. The further people get involved in the process of trying to get that house, the more emotional they get, and the less rational their decisions become – so chances they end up paying more than they intended, and more than the property is worth are increasing.
Why is underquoting bad for home buyers?
It wastes our time. When home buyers decide on the price-range they can afford, they do so to look at the houses within that price range and choose the one that suits their needs and satisfies their “wants”. Give them a more expensive house disguised as something they can afford and they will come to inspection, only to find out that this house wasn’t meant to be their home. Instead, they could have gone to inspect a place they could actually buy.
It also wastes our money. Let’s take the same example as before, if a house to be sold on auction is advertised within price range $510,000 – 530,000 and this is an affordable price range for you as a buyer, then you may decide to come to the auction to bid on the house. As you know, any house sold on auction is sold unconditionally, therefore any inspections, pest or building, should be done prior to auction. So let’s imagine that you have inspected the house, you like it and decide that you are willing to pay for it the top of the range – $530,000 or even a couple of thousands more, if it comes to that.
As any sensible person you probably decide to arrange the building and pest inspections prior to auction, because after all, this may be the biggest purchase in your entire life. And then, when you come to the auction, it becomes evident that the vendor had no intention to sell the house for $530,000 – in fact, the reserve price was set at $540,000 and the price that house was sold for was $560,000. What just happened? You’ve lost the money you spent on inspections, and you never really had the chance to buy that house.
Have you been burned by agents’ underquoting? Leave a comment here, share your story.
{ 3 comments… read them below or add one }
As Buyers’ Agents, we see under quoting on a regular basis all over Sydney. Here are a few examples:
http://www.ohpropertygroup.com/blog/quote-them-low-and-watch-them-go/
http://www.ohpropertygroup.com/blog/underquoting-vs-stiff-competition/
http://www.ohpropertygroup.com/blog/auction-action-27-march-2010/
http://www.ohpropertygroup.com/blog/a-property-quoted-between-800-900k-sold-for-1-168-million/
Hi Chris,
All very valid points. The other point to mention though is, when the agent under quotes,they are also inadvertently missing out on the higher end priced buyers.
How?
Searching for property on real estate sites, buyers tend to indicate their price range. They generally are specific and so narrow their price point.
Properties, that are priced low, which in fact are valued higher, may be missed by these higher end buyers.
The other point is…
Property owners and agents should focus more on, why the home is valued at the advertised price, rather than focussing on how low they can set the price range.
At a recent auction in North Melbourne, bids well above the upper end of the advertised estimated range, and the property was passed in. I’m a first home-buyer and was disgusted.