Under the hammer

Mixed response to new real estate rules

IF you’ve ever bought real estate, you’ll more than likely be familiar with the scenario: You find a house you love. You do your homework. You work out your budget. You get your finances in order. You might even arrange the building and pest inspections. You front up at the auction – home loan documents under your arm and a vision in your mind of where the lounge will go.

And the property sells for tens, if not hundreds, of thousands of dollars above the advertised “offers over” price range. You’re left gutted and possibly out of pocket and you’re back to square one.

It’s the real world and disappointment happens. But it may also be that you’ve been a casualty of “underquoting” – a well known and widely used real-estate marketing practice that, while at best equivocal, has been perfectly legal. Until now. From January 1, the practice has been banned thanks to a NSW government crackdown designed to clarify how real estate agents should market their properties and to stop them understating property prices as a way of attracting more buyers.

In layman’s terms, underquoting is when an agent states or publishes a price for a property, which is less than their reasonable estimate of that property’s selling price as quoted in the agency’s agreement with the vendor.

While proponents say the practice is an effective means of ensuring the best possible price for their vendor, the state government – specifically, Fair Trading – believes underquoting “can cause interested buyers to waste time and money on inspecting properties, getting reports and attending auctions based on misleading estimates of the selling price”.

The department’s new guidelines, amended in law under changes to the Property Stock and Business Agents Act 2002, are intended to provide clarity for all involved – buyers, sellers and agents.

Under the new regulations, it will be illegal for agents to use the term “offers above/over” when marketing a property – in other words, give potential buyers understated or vague estimates of what they think a property will sell for. Agents will be required by law to provide appropriate documentation to prove compliance with the new regulations, and may be fined up to $22,000 and lose their commission if they’re found committing an underquoting offence, according to Fair Trading.

While real estate buyers will conceivably be the significant winners from these new regulations, reaction from the industry and from vendors has been mixed.

Andrew Palmer, principal of Mudgee’s The Property Shop and REI board member, says the new legislation is completely unnecessary.

Taking away the agents’ ability to use the “offers over” strategy is a particularly sore point with Palmer, who says legislation already existed to protect consumers from the abuse of the practice.

“We were already required to provide documented evidence of comparable

“This is a knee-jerk reaction to an inflated Sydney market – and regional areas, agents and vendors have been caught up in the net.” – Andrew Palmer, principal of Mudgee’s The Property Shop and REINSW board member

properties and to state, in an agency agreement, our opinion on the expected selling price. They could have tightened those requirements slightly, without taking away a vendor’s right to market their property in way that would allow them to attract the highest price possible.”

In his personal assessment, the government’s intervention is tantamount to tampering with market forces.

“The vendor should have the right to offer their property for sale using the most effective marketing methods available. What this does is restrict them to a capped price. In a rising market, buyers may well be prepared to pay above what an agent estimates the property is worth.”

Palmer acknowledges the practice has been abused by agents who have “done the wrong thing”, but says those agents are in the minority and will always do the wrong thing regardless of this legislation.

“The industry regulates itself, to a degree. The market will catch up with the agents that aren’t above board, particularly in smaller communities and regional areas like ours.”

But regional areas haven’t been largely considered in this equation, says Palmer, who believes the push for change has come directly from an overheated metropolitan market.

“This is a knee-jerk reaction to an inflated Sydney market – and regional areas, agents and vendors have been caught up in the net.”

In Palmer’s own Mudgee-based business, he says it’s not been the practice to use the “offers over” strategy, given the smaller size of the market.

But in markets like Dubbo, where it’s been used quite effectively, he says, the legislation is likely to have a significant impact.

“Agents and vendors will now have to effectively cap what they can expect to get for a property, where before, an “offers over” strategy may well have achieved a better price. You can put whatever price you want on a property, but you still have to get people to turn up and you’re not going to get people turning up if they think the property is out of their price range.

“The good thing about “offers over” is that interested buyers decide on the highest price. The decision is based on whatever the competition is in the market place.”

If the government was serious about “cracking down” on the real estate industry, they should have turned the spotlight on the ease with which any Joe Blow can hang out a shingle as an agent these days, according to Palmer.

“It’s far too easy. We now have a situation where someone can wake up one morning and decide they want to be a licensed real estate agent; they can go online, complete a license course in a matter of weeks. Then six weeks later, Fair Trading hands them a license.”

Not all real estate agents see the new regulations as punitive.

Dubbo-based agent, Western Plains Real Estate’s Anthony Chapman – who is also vice chairman of the Estate Agents’ Co-operative – says the reforms provide clarity for buyers, sellers and agents.

“It’s a fair call. It’s a step forward for the industry in general.

“There’s no doubt there are agents around the industry who were underquoting to generate interest in properties.

“It’s totally unfair to potential buyers who go out and do pest and building inspections thinking they’re going to be able to purchase the property at a certain price only to find it sells for sometimes hundreds of thousands of dollars over the estimate.”

Chapman concedes this hasn’t necessarily been a widely used practice in the Dubbo market but that the data shows it has certainly been an issue in larger market places.

“What this legislation will do is make agents more accountable in their estimations of the pricing of properties, and that’s a good thing for the whole industry and for consumers.”

“It’s a fair call. It’s a step forward for the industry in general.” – Anthony Chapman, principal of Western Plains Real Estate and vice chairman of the Estate Agents’ Cooperative board