The underquoting debate continues to bubble away with more rule changes on their way soon.
The proposed changes to property Auction rules include a requirement for vendors to disclose the reserve price 7 days prior to auction. Subject to the wording of the final act, it may have overlooked one important point.
What if the seller changes their mind just before or after the auction? Underquoting is not just about the role of real estate agents. Sellers are central to this issue as well.
Implementing a requirement for the reserve to be disclosed, creates a very strong message to buyers that this is absolutely the price at which they can buy the property (subject to higher offers). But even if you are the winning bidder at auction the vendor does not have to sell it to you at that price. Plus the highest bidder is not contracted to buy either.
“Knocking down” a property at auction does not form a binding real estate sale in Victoria. Take a quick read of Section 126 of the Instruments Act 1958 if you feel like it, but a property is not sold until the contract of sale is signed and exchanged by both parties. “Selling” at auction or any other verbal agreement does not constitute a binding sale of land.
If a buyer or seller changes their mind after the auction and decides not to sign the contract at the “knocked down” price they will not be very popular. However publishing a reserve price prior to auction will not compel the vendor to sell at that price or any other price.
The proposed legislation may not contemplate the situation where the vendor discloses a reserve price of $1 million 7 days prior to auction. Then the bidding reaches $1 million at auction and is “knocked down”. But after the auction the vendor says “Soz… the price is now $1.1 million.” Or they decide not to sell at all. Remember a buyer can also change their mind after auction.
This is not some obscure problem. It happens more often than you would think.
Or what if the seller wants to change the reserve price within the final 7 days prior to auction.
Or what if a buyer feels the price is too high and doesn’t attend the auction. But then it sells for much less than the published reserve. Not helpful.
Technically the rules may choose to impose a penalty on a vendor or purchaser if either party does not document the sale as per the terms and conditions agreed at auction but this gets messy.
The history of legislation and regulation to regulate underquoting and increase transparency is a series of patches and tweaks. Each one trying to fix a gap or loop hole making the entire process complicated and harder for everyone to understand.
Interestingly, prior to real estate marketing portals there was no published quote price. Price was discussed with the agent which gave it context and more meaning.
Underquoting is misleading and unacceptable. Just as dummy bidding was misleading. But the current and proposed regulations unfortunately don’t fix the problem.
Understandably buyers rely on the selling agent’s advice on value to make an initial assessment of a property. This helps sort property in or out of their broader search.
If a buyer then gets serious on a property they really need to get their own advice. This includes advice on all matters. Property, legal and financial. Remember the selling agent is acting for the seller.
It is not a good idea for buyers to spend a huge amount on a property without professional advice. Advice which would easily navigate around the impact of a quote or reserve price. Price guidance of any form can be misleading and disappoint buyers.
So endemic is underquoting in the market that even when the reserve price is within the quote range, buyers will add on 10% in the assumption the quote price is low. Then that buyer’s assessment of the reserve is too high and they may disregard the property and miss out.
Here are a couple of potential solutions. The best option may include a combination or parts of each.
1. Ban quoting of any price completely.
This is the silver bullet solution for the government. Not necessarily the market.
Sellers or their agent, would not be allowed to provide any price guidance.
This way buyers (or their professional advisor) would need to do the work to understand the market and make their own assessment. It totally removes any risk of misleading buyers. Sellers and agents may be required to provide comparable sales evidence.
Compulsory disclosure of all sale prices would help buyers and their advisors assess a property’s market value. Especially if land or building size was included in the property sale disclosure details.
2. Bidder registration and waiver.
Require bidders to register and engage independent advice. Or they can elect to sign a waiver that they have chosen not to appoint a buyers agent. This encourages bidders to get their own professional advice. While it is recommended, it is not compulsory. This could be part of a bidder registration process. The registration document could also include other disclosure statements about price quoting and auction bidding rules.
3. Require the Section 32 statement to include a building & pest report and maybe a valuation.
This doesn’t address the price quoting issue but it at least saves bidders the cost of getting building and pest inspections prior to auction. So even if it turns out the property is out of their price range they have not spent time and money on a building inspection.
4. Give the buyer at auction a cooling off period
This has many problems with it and is not a great option. The idea is buyers don’t need to spend time and money prior to an auction getting finance and building reports done. They can bid at auction and if successful finalise their finance and get a building report.
Combining parts of the above and testing it with real estate’s professional body will create a workable solution for all.
