Underquoting seems rife in this property market, but how can you prove it?


In a booming property market, homes are selling at auction for sums that blow the agent's price guide out of the water.

But the issue of underquoting is nothing new.

Years ago, my partner and I set our hearts on a rundown (let's be honest, derelict) house slated for sale at auction in Sydney's inner west. The agent quoted an upper price estimate, which was within our budget though at the top end.

auction underquoting prices

Hopes came crashing down when the auctioneer opened bidding at the top price we'd been quoted. After exchanging "What the?" looks, we slunk out of the auction room leaving buyers with deeper pockets to fight it out.

Fast-forward to 2021 and underquoting is once again making headlines as shell-shocked house hunters watch properties sell under the hammer for prices that dwarf the agent's price guide.

In June, a Toorak mansion sold at auction for $14.25 million, smashing the upper price guide of $11.5 million. In March, a Bondi apartment sold for over $20 million, with the opening bid being a market-whacking $14.5 million though still within the price guide of up to $15 million.

While both homes are prestige properties, underquoting can deliver serious hip pocket pain to buyers with more modest aspirations. Ticking the boxes for due diligence - having the sale contract reviewed by a legal professional, and arranging pest and building reports - has the potential to rack up fees of around $2000, which can prove pointless when a home sells for vastly more than the price guide.

But in today's hot market, are agents underquoting as a form of bait advertising? Or is competition so intense that it's becoming impossible for even the professionals to accurately predict what a property will sell for?

Difficult to prove

Angus Raine, executive chairman of Raine & Horne Property Group, is a veteran of five property booms.

"Every time a boom comes up, the underquoting debate kicks off," he says. "There is legislation and fines in place in some states to prevent underquoting, and regulatory authorities do check this. But in a fast-moving market, underquoting is difficult to prove."

To be clear, underquoting occurs when an agent deliberately publishes a guide that's below their reasonable estimate of the home's likely selling price. The key words here are "reasonable estimate".

"Accurately estimating a property's likely value comes down to three factors - comparable recent sales, an agent's experience, and market conditions," says Ray Ellis, chief executive of First National Real Estate.

However, as Raine points out, the downside of basing price estimates on recent comparable sales is that agents are looking at the market in a rear-view mirror.

"In 35 years I have never seen a property boom like the present that extends right across Australia, including regional markets. And, yes, some of the prices we are seeing property sell for at auction are unbelievable.

He says auctions represent only about 20% of the market.

"But right now, the planets have aligned for exceptional market conditions across the board."
That alignment of factors has not happened overnight. Both Raine and Ellis point to a five-year low in the supply of homes for sale. "Since 2015 we've seen historically low listings on the market," says Raine.

"So the demand bucket has been filling for six years."

He believes this is why agents are seeing queues of up to 50 people attend inspections and as many as 20 registered bidders thrashing it out at auctions.

The upshot is that demand is far outpacing supply. CoreLogic's research director, Tim Lawless, sums up the situation: "The sales to new listings ratio remains around 1:1, meaning for every new listing there is more than one sale occurring."

Overarching all this are interest rates at record lows. "With finance so cheap, there is no barrier to buyers bidding well beyond expectations," says Ellis.

Agents face penalties

The NSW Department of Fair Trading cautions that just because a property sells for more than expected doesn't mean the agent has underquoted. Agents need to show their price estimate was reasonable, up-to-date and evidence-based.

Those caught underquoting can face strict penalties. In NSW that means fines of up to $22,000 and loss of sales commission.

In Victoria, agents must provide buyers with a statement of information (SOI) that sets out an estimated sale price within a 10% range, as well as details of written offers received - but rejected - by the seller. Agents who flout underquoting laws risk a penalty of more than $31,000.

Elsewhere the situation isn't as clear cut. In Queensland, for instance, agents are banned from giving price estimates on homes going to auction.

Despite the risk of penalties, there are clearly rogue agents operating in the market.

In June 2021, a series of blitzes saw NSW Fair Trading issue 137 penalty notices and 224 warnings, with fines totalling $150,710.

"The latest checks uncovered a myriad of non-compliance, and we will continue to conduct these blitzes until the industry pulls its socks up," says Kevin Anderson, NSW Minister for Better Regulation and Innovation.

Nonetheless, the onus is on buyers to do their own research and develop a sense of what a home will sell for.

Risks in a pre-auction bid

Making an offer ahead of auction day can see buyers avoid a frenzied bidding war. But it's a high-stakes strategy.

"People who make pre-auction bids tend to be the underbidders who've missed out on a couple of recent auctions, so they know the market," says Raine. "The earlier you put an offer in, the better.

The closer to auction day, the more likely the agent will advise the seller to take the property to auction."

While Ellis believes it can be worth making a pre-auction offer, he recommends talking to the agent to get a feel for the seller's mindset.

"Some vendors are determined to complete their auction campaign because the market is so strong," he says. "If that's your vendor's view, a pre-auction offer, no matter how strong, is likely to do just one thing - reveal your hand."

If it turns out the vendor is open to an offer, Ellis says: "Make your offer a strong one and be prepared to move immediately should they accept."

Don't reveal your hand

In a seller's market, having finance lined up in advance can give buyers an edge over the competition. The catch is that many lenders are swamped with loan applications at present.

"While some people can have their loan application assessed in a matter of days, the vast majority endure extraordinarily long turnaround times," says Tim Kerin, principal of Mortgage Choice in Kingsley, Western Australia.

"It's not uncommon to see a lender take two or three weeks to pick up an application and assess it, then another two or three weeks of back and forth until an unconditional approval is actually achieved."

Given that auction campaigns usually run for just four weeks, lender delays can see buyers head into an auction without pre-approval. However, there may be a solution.

"When the agent or seller is willing to accept it, we [mortgage brokers] can simplify things by providing a loan eligibility certificate, often called a letter of eligibility, instead of a pre-approval," says Kerin.

"It's a document I can produce very quickly as a mortgage broker, without sending an application to a lender. It communicates that I believe the buyer qualifies for a loan, having done all the checks necessary to be confident of this myself. The document can cut through the waiting and stress, often resulting in offers being accepted without the need for a pre-approval."

For buyers who do have pre-approval, it pays to keep your cards close to your chest. Telling the agent exactly how much finance you have is the equivalent of alerting the vendor to your maximum offer, and it can just fuel the seller's interest in lifting the reserve price.

Buyer's agent can do the hard work

Engaging a buyer's agent won't stop a property selling at auction for more than expected.

However, if you're pressed for time researching the market, sorting through listings or you're just not comfortable negotiating directly with a seller, a buyer's agent can do the job for you - at a price.

Fees vary widely, but you can pay around $3700 for single services like research and price negotiations, through to around 2.5% (plus GST) of a property's sale price for a complete end-to-end service. On the median capital city home value of $715,100 this can add an extra $18,000 to your buying budget.

Sellers are happy, of course 

While buyers and buyer's agents often raise the issue of underquoting, there is one group who isn't complaining about higher than expected auction results, and that's sellers.

As Angus Raine points out, "agents get targeted for underquoting, but we don't make the market. People forget that agents are paid by the vendor to get the best price possible. When today's buyers are ready to sell, they expect an agent to do exactly the same thing to get a great price on their property."

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A former Chartered Accountant, Nicola Field has been a regular contributor to Money for 20 years, and writes on personal finance issues for some of Australia's largest financial institutions. She is the author of Investing in Your Child's Future and Baby or Bust, and has collaborated with Paul Clitheroe on a variety of projects including radio scripts, newspaper columns, and several books.