Underquoting rears its ugly head

There has been an uplift in agents underquoting property prices … more regulation makes good sense.

PORTFOLIO POINT: Property buyers and sellers need to be on alert, with some agents choosing to underquote on prices. Regulation may be the only remedy.

That perennial curse of investors and home buyers – underquoting – is rearing its ugly head again.

It is certainly on the rise in Melbourne and, to a lesser extent, in Sydney. For those not familiar with the term, underquoting occurs when an estate agent quotes a price point or range for a property in their marketing material that is significantly below what the vendor is willing to accept.

It’s important to understand that a property that sells well above the quoted range is, not by itself, definitive proof of underquoting. From time to time, enthusiastic bidding that pushes the sale price significantly beyond the quote range and, more importantly, the vendor’s reserve is not underquoting.

It’s the relationship between the quote range and the vendor’s reserve that is crucial in defining underquoting, not the relationship between the quote and the final sale price. This is a distinction most buyers and commentators fail to grasp.

Estate agents who knowingly underquote a property well below the vendor’s reserve do so with the aim of drumming up enough interest such that they can push buyers to extend their budgets.

It’s a pernicious practice because many unwitting buyers take the range at face value and invest time and money in attending inspections and commissioning building and pest inspections. But when it comes to auction day, they are appalled to find that their budget was woefully insufficient from the outset.

The practice has re-emerged because we are in a very transparent and predictable market. That’s key, because in these conditions it is easier to judge to within 10-15% of where a property is most likely to sell. Offending agents are being exposed because they’re passing in properties at auctions well above the quote range.

Exasperated by the practice, David Lack, an estate agent at Biggin & Scott in Port Melbourne, posted a full-page advertisement in a local paper condemning the behaviour.

“I took the ad out because I was frustrated with particular agencies totally misrepresenting the anticipated sale price of properties,” said Lack. “We were handling similar properties and quoting realistically but finding that buyers were disregarding our properties and going to the underquoting agent’s properties instead” ... and, I presume, being seriously misled and disappointed!

Lack rightfully points out that underquoting invariably injures many parties. “For instance, a property that might be worth $1.2 million is quoted as early-to-mid 900s,” he says. “Competition at the auction sees the property passed in at $1.1 million. The underquoting also hurts the other listings competing with that property because it steals the limelight with its low quote. Buyers suffer because they’ve wasted their time and possibly money and perhaps missed out on something elsewhere in the market in the meantime. And the vendor of the underquoted property misses out because they wasted their advertising dollars and have not got a result.”

Brendan Jack, owner of Sydney-based Buyers Service for Real Estate, confirms that underquoting is an issue in New South Wales. “As a buyer’s agent we do see it out there and there are sales people who still do it.

“It is the agents who are unsure of themselves or haven’t got the sales capacity to work their buyers. Often they come from the weaker firms or haven’t had sufficient training and certainly don’t have the required in-depth experience of the marketplace. They think that by underquoting they’ll get buyers in and then work them up to the desired price,” he says.

I disagree with those who think underquoting is mostly harmless and too widespread to stop. I believe the following regulatory steps would help:

  • Pricing information should be mandatory in all advertising.
  • The estimated asking price or range should be based on recent comparable sales and/or interest in the property during the marketing campaign.
  • The range can be adjusted during the campaign to reflect interest and feedback from buyers and, if applicable, changes in market conditions.
  • Not only should a vendor and their agent agree a price range at the start of the campaign and include it in the sale authority – as is the case at the moment – but I believe this range should be set to reflect the vendor’s initial reserve.
  • Furthermore, when and if the vendor and agent revise the quote range, it should be mandatory that the reserve is always within the quoted range even if the vendor doesn’t disclose the exact figure to the agent. This modification should be set out in an addendum to the sales authority.

Interestingly, the South Australian government is currently considering legislation requiring the reserve to be no higher than 10% above the listing price.

Saying that, I do respect the fact that residential property is a privately held asset – it’s not an ASX-listed publicly-traded commodity. So we can’t be too prescriptive and vendors must be allowed the right to vary their reserve as they see fit, and especially if market conditions change during the course of a campaign.

Failing a change in legislation, investors have to be savvy. The best thing a buyer can do to avoid being a victim of underquoting is research. Before you embark on your buying campaign, record the actual sale price of properties similar to the type you hope to buy over the last three months or so to establish what the current market price is. When reviewing prospective property, ask the selling agent how they determined their quote range. Ask to see the comparable sales and check to see if the agent is genuinely comparing apples with apples.

Note that an agent isn’t obliged to give a buyer this information as they are acting for the vendor, not you the buyer. But if they refuse, this is a red flag.

I’m optimistic that underquoting can be banished through judicious regulation and that the market need not suffer. There is a precedent.

At one point, many agents thought dummy bidding was a valid way to get an auction moving, when it was really a blight on the integrity of the market. Through careful regulation that practice has been effectively wiped out, and it has enhanced rather than impaired the auction process. Let’s do the same with underquoting.

Property Q&A

This week:

  • Is now a good time to get into more property debt?
  • Should I buy in Singapore, or rent and buy in Brisbane?
  • What are the impacts of the Newman Government on Queensland property?
  • Is Sunshine a good outer-suburbs option?

Is now a good time to get into more property debt?

I have two properties in Darwin. The first is my home close to beach and within 10km of the city, valued at $1 million. I also have an investment property valued at $530,000 returning $600/week rent. If I refinance, I can borrow up to 80% on my residence and 90% on the investment property. Servicing is not an issue. I am keen to build a strong and diverse property portfolio to supplement a rather meagre superannuation outlook. My partner and I are in our 40s. Is it a good idea to get into more debt at this time? I would be looking to purchase two or three new(ish) properties in the next 12 months geared to 90% or 95%, preferably in an inner Brisbane suburb or regional centre such as Townsville (in the $300k-$400k range).

You appear to be in a good financial position. Work out a financial plan with a qualified independent advisor (read “fee for service and no commissions”), then arrange loan structuring.

Next, concentrate on asset selection – the number of properties is not as important as the quality. Work out your total investible budget and then choose the best assets, not the most assets.

If you are to invest again, it’s definitely wise to diversify beyond Darwin and to focus on growth assets. Brisbane is certainly a good location for long-term investment but avoid new and newish properties and regional centres such as Townsville, which may not be as resilient across the economic cycle and that do not have the scarcity value of a capital city location.

Should I buy in Singapore, or rent and buy in Brisbane?

My wife and I currently live in Singapore and are looking to stay for up to another five years. The rent in Singapore is obscene so I am seriously looking at buying a two-bedroom apartment but am concerned by three major risks.

  • All property in our budget (SGD1.2m) seems to be on a 99-year lease. I’m nervous about leasehold even if most places are only at the start of the lease.
  • Moves by the government to cool the property market may go too far. They have put up the stamp duty to 13% for anyone who is not a permanent resident and introduced laws whereby one can only borrow up to 80% of the value of the property.
  • The potential for unlimited supply worries me due to the theoretical idea that apartments can keep going higher and higher.

The upside is that interest rates are very low and I could throw $4,000 a month at a mortgage and build some equity. The alternative is to buy an investment property in Brisbane but it could be too much of a stretch to make repayments on a loan in Brisbane and rent in Singapore.

Ultimately you have two choices: buy in Singapore, or rent in Singapore and buy an investment property in Australia. With either option you’ll need good advice on international tax implications. The first step is to get an experienced accountant to help you model both scenarios including lifecycle costs (i.e. acquisition, holding and exit) of a Singapore property over five years versus renting there, and include range of price and rental growth and loss scenarios. Of course, you’ll also need to make some simplifying assumptions regarding your income, interest rates and rental inflation. Whilst the result may not be scientific, it will give you a guide to what sort of capital growth is required to make buying in Singapore stack up.

You can then make a judgement about whether you believe that level of capital growth is realistic. In light of your point about the government looking to cool the property market, and the fact that, as a highly trade-exposed country, Singapore is vulnerable to the health of the global economy, it will be prudent to be relatively conservative about expected capital growth. If the figures add up, you should then consider talking to a local independent property adviser to assist in identifying a suitable asset. Your international tax expert will also consider implications of holding or selling the property when you return to Australia.

Don’t be concerned by the 99-year lease. Many properties are sold like this in sophisticated property markets – including Canberra – without any problems.

What are the impacts of the Newman Government on Queensland property?

What impacts do you think the recent policy decisions by the Newman Government in Brisbane (e.g. public sector redundancies and changes in stamp duty concessions) will have on the Brisbane property market?

The newly elected Newman Government has courted controversy by cutting public sector jobs by around 14,000 and by replacing the $7,000 universal first home buyers’ grant with a $15,000 grant that is only available to first home buyers who purchase a new property.

I support the decision to end the universal grant but oppose the increased incentive to buy new property. It is inevitable that the main beneficiaries will be developers, who will use the grant to inflate their asking prices well beyond underlying market conditions, likely resulting in negative equity for the owners. I’m also concerned that the policy will distort market supply and composition and we’ll face a situation in a few years where many first home buyers regret buying a new property in fringe suburbs and in high rise blocks.

Consequently, we may see a glut of high-rise units and fringe suburb properties on the market in a few years that lack scarcity value and sit on the market a long time because asking prices are not supported by underlying market conditions. That said, this section will represent a small proportion of the overall Brisbane market. I doubt that these policies will make a significant difference to Brisbane market dynamics long term, particularly in the wider established market.

Is Sunshine a good outer-suburbs option?

Notwithstanding your advice about only investing in inner suburbs, aren’t there often pockets of good investment opportunities a little further out? For instance, I’m thinking of investing in Sunshine, Melbourne, near the Sunshine hospital, where I hope to take advantage of rental demand form medical workers.

Yes, it is true that there can be localised pockets of good investment properties, but they do tend to be few and far between. Moreover, they are not necessarily consistent performers in terms of capital growth because of low underlying land values.

For instance, whilst Clayton, in Melbourne’s south-east benefits from its proximity to the Monash Medical Centre, it is still 18 kilometres from Melbourne’s CBD (and a long awkward commute via the Monash freeway) and it certainly doesn’t perform as well as closer-in eastern suburbs such as Glen Iris or Elwood.

The suburb of Sunshine is only 12 kilometres out from the CBD, but land values drop off quickly as you go west due to the greater level of industrial activity and lower levels of amenities and job opportunities in the area, so I don’t view it as a prime investment area.

Whilst there may be particular streets that perform better than average in Sunshine due to their proximity to the hospital, they are still unlikely to meet the required investment performance. The danger of your strategy is that it is too focused on maximising rental returns at the expense of capital growth. My other concern is that you have predicated your strategy on just one pool of tenants – medical workers.

A far more reliable strategy is to invest closer into the city where one knows demand is underpinned by a broad range of tenant profiles and supply is genuinely scarce.

Monique Sasson Wakelin is a co-founder and director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au

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