A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
How to avoid the perils of underquoting
Underquoting only used to be a problem for inexperienced buyers. They were the ones that carried the cost when a property was marketed well below the vendor’s reserve price. They wore the expense of building inspections and other research costs – plus precious time wasted – for assets they had no realistic hope of buying.
For vendors and agents, underquoting was a consequence-free crime. Laws were lax with loopholes that fitted a truck. The most glaring issue was the lack of sanction for agents and vendors for quoting inaccurately. Even in the most flagrant example of underquoting – when a property is passed in at auction with a highest bid that is 10 or 20% above the top of the quote range – agents had an escape clause: blame a greedy vendor. With underquoting laws focused on agent behaviour, there was no obligation on vendors to actually have a reserve price that was meaningfully linked to the agent’s price estimate. On occasions, the vendor was being greedy; more often the reserve was eminently reasonable and the agent knew it was.
Moreover, state regulators had little appetite or imagination to use even their limited powers to catch perpetrators. It was no wonder that the technique was rampant, creating widespread disgust in the community.
For instance, although state law invariably required agents to base a price estimate on current market value which in practice necessitated the agent undertake a desk study of recent comparable sales, agents wilfully and routinely chose inferior properties as their ‘comparables’ to justify the underquote. And no one was checking on them!
But the landscape is changing, with state governments tightening rules and enforcement. As a result, underquoting is – quite rightly – becoming a problem for vendors and agents who don’t adapt.
Let’s start with comparable properties. Since 1 January a new legal regime in New South Wales not only requires agents to document for the vendor an estimated price or range plus the ‘comparables’ evidence, but the government advise they will be policing the process. South Australia has had similar rules for a couple of years.
South Australia has, quite adroitly, also tackled the problem of agents blaming vendors for underquoting. Vendors are required to put a ‘minimum acceptable price’ in the sales agency agreement. The property cannot be advertised below the value of the higher of the agent’s estimate and the vendor’s minimum acceptable price. Moreover, the vendor’s final reserve cannot exceed 110% of the vendor’s minimum acceptable price.
Victoria is also moving on underquoting and is showing that even with what most observers consider to be weak laws, a commitment to enforce them can make all the difference. In recent months, a number of estate agencies were raided by the local regulator and they’ve combed through correspondence between agents and vendors to find evidence of an underquoting strategy. The government clearly think they have it, as there are several prosecutions underway.
We’re already observing a reduction in underquoting in Melbourne, and talking to peers in Sydney and Adelaide, they are also seeing more realistic quoting by agents.
Prospective vendors shouldn’t assume that only agents will be prosecuted if underquoting is uncovered. For example, in South Australia, false representation in advertising by any party could lead to a $5000 fine or a one-year jail sentence. So if you’re selling property, make sure you – and the agent – play by the rules.