When Sarah* (not her real name) stumbled across her dream two-bedroom apartment in Edgecliff, an eastern suburb of Sydney, she was hoping she’d finally found something within her budget.
But on inspection, the real estate agent immediately asked if he could expand his price range. “They said it was listed for $1.1 million because they wanted $1.2 million, $1.3 million,” he said.
“I was like ‘are you kidding me?’ It’s so demoralizing.”
Sarah has visited nearly three dozen properties in six months and now instinctively questions all market prices in case the agent is underquoting.
“I don’t want to waste time investing myself emotionally and then have them say no,” she says. “You’ll often get something in five days that says the price guide has been revised to $150,000. It’s pretty depressing.”
Real estate agencies have said that undercutting remains “endemic” due to poorly regulated and policed regulations.
The practice refers to posting listing prices substantially below market value to artificially attract more potential buyers. And while it is commonly identified as a symptom of buoyant markets, in down markets it can make it even more difficult for buyers to estimate the real value of the property.
In May last year, NSW Fair Trading established a dedicated undercutting team to address “growing concerns” about the practice.
Since then, 161 notices of violation of penalties for undercutting and related offenses have been issued. Each case was fined $2,200.
Agents in Sydney typically charge a commission of around 2% on sales, which means that the median home price in the city of $1.6 million would be around $32,000.
In 2020, 55 penalty notices were issued, including 25 issued after the undercutting team was established, out of a total of 200 complaints.
“New South Wales laws regulating real estate agents have strong protections against misrepresentation of estimated sales prices and undercutting practices,” a spokesperson said.
Purchasing agent Paul Mulligan says the regulations “are not effective, because they are still happening.”
“[The fines] They are nothing,” he says. “They need to name and shame officers. That’s the only thing that will change things.”
Mulligan says he could “write a book” on the “hundreds of stories” of people who were scammed during his time in the industry, citing price discrepancies of up to $500,000.
“Frustrated buyers are just fed up, they are at great risk of making a big mistake,” he says.
Waqas Khawaja estimates that he and his partner experienced underbids half a dozen times at auctions in Sydney before finally securing a property in the south-west.
“You don’t realize what’s happened until you lose an auction for a quarter of a million,” he says.
“It’s devastating at first because as a first-time homebuyer, you make the emotional mistake of becoming attached to a property.
“Realizing you never had a chance feels like a betrayal.”
southern malaise
Buyers’ advocate David Morrell says undercutting is even worse in Victoria, Australia’s “auction capital”.
From July 1, 2021 to July 31, 2022, Consumer Affairs Victoria (CAV) recorded 1,466 undercutting inquiries and complaints. During the same period, only 48 violations and 171 official warnings were established.
A Victorian Consumer Affairs spokesman said the undercutting was “taken very seriously”. “Agencies that do anything wrong face fines of more than $36,000 and a loss of sales commissions,” they said.
“Victoria Consumer Affairs carries out enforcement activities throughout the year, including auction monitoring, inspections and investigations where necessary.”
But Morrell estimates that between 70% and 80% of properties in Victoria are undervalued.
In 2003, he became the first person to file an alleged undercutting complaint with the Australian Competition and Consumer Commission (ACCC).
The Melbourne real estate agent was later found to have engaged in misleading conduct by advertising prices of “600,000 or more” and then “650,000 or more” for a house that sold at auction for $780,000. No penalty was imposed.
“It’s an endemic part of real estate practice,” he says. “People have been traveling three to four hours and the price is $400,000 more than they expected.
“It is misleading, it is a fraud to buyers. And until meaningful penalties are imposed, the regulations have been ineffective… if one does it, others have to follow.”
The first underpricing law was passed in NSW in 2016, requiring listed prices for residential property sales to align with market values or seller valuations and cracking down on vague formats of listing prices as “600,000 and up”.
A year later, a similar law was implemented in Victoria.
A 2021 University of Melbourne study found that the introduction of undercutting laws worked to bring listing prices in line with market values, leading to a relative drop in auction sales prices of between 2% and 6% by cracking down on oversupply.
But Morrell said the laws had done little to deter realtors and were rarely enforced.
“There has been an undercutting of millions,” he says.
“I had a private sale listed at seven million, my buyer offered seven and they came back and said ‘owner wants 8.8, changed his mind.’ It’s just trash…the dirty part of real estate that gets rubbed under the rug.”
No disincentive
Scott Aggett left residential sales in 2015, “unhappy” after two decades in the industry. He has since founded Hello Haus, a national trading service.
“I felt like there was a better way to serve shoppers than the bullshit that was going on,” he says. “I couldn’t take all that gambling…as an agent, I didn’t feel like I could win unless I was lying.
“Nobody was coming to my open house for inspections because I was giving them the real prices, and it’s still plentiful in 2022.”
Hello Haus research found that it takes Australians an average of seven months to buy a property, with 45% of people reporting buyer’s remorse.
“Buyers spend 90 hours of their time [looking]inspect 300 properties, fail five times and on the sixth time compromise and overpay,” says Aggett.
“Last week I had an agent openly say… ‘we tell homeowners if we quote within the 10% range, we’ll have zero people through the open house.’
“They are trading up to 30% less to generate interest. The goal is to drive as much traffic to the property as possible to create competition and then drive it north. That is being openly discussed.”
Last week, Aggett bought a property for a client for $3.75 million, listed at $3.2 million.
“That’s consistent with what I have to deal with,” he says. “It’s a shit show… and this happens every day all over Australia.”
Aggett says fining estate agents $2,200 in NSW is a small disincentive when the commission is usually at least $30,000.
“They need to remove the full fee [the] agent… and agents should have a strike policy,” he says. They must also openly disclose the price of the agency contract. But it doesn’t seem to be in the cards right now, and it’s been going on for decades.”
The Real Estate Institute of Victoria (REIV) has submitted a submission to Victorian Consumer Affairs advocating for transparency reforms, including improving the Mandatory Information Statement that estimates prices for all residential properties.
“Part of what we’ve been pushing … is to have evidence-based price regulation,” says REIV Executive Director Quentin Kilian.
“At least then the buyer can say it’s okay, it’s not a comparison, but here’s why. Real estate markets are so diverse that they move differently and have different pressures. You can’t have one size fits all.”
Kilian says that as the market begins to settle down, he expects to see “less discrepancies” in price estimates. But he maintains that quotation marks are not as common “as people would like to think.”
“It happens from time to time,” he says.
“But in a really buoyant market, it can often just be that the price moved at the time it was first listed or the market got nervous at an auction and goes way beyond expectations.”
Leave a Reply