Underquoting: 20% is the new 10%

Underquoting the expected sales price of properties going to auction has worsened since Dummy Bidding was outlawed.

Soon after the crack down on Dummy Bidding in 2004, underquoting exploded as an alternate solution to create ‘competitive auctions’.

Fewer properties went to auction at the time, but those that did, were promoted by about 10% below the vendor’s anticipated reserve price. Some auctions sold by more than 10% above the agents guide price, some sold for less than 10%.

But the unofficial 10% rule worked to give vendors, buyers and agents an insight to how things may play out.

The unofficial 10% rule has gained further credence as policing underquoting has been somewhat deficient in the marketplace.

In order to sell more properties under auction conditions, agents began quoting 15% to 20% below the vendor’s reserve price in order to attract a sufficient number of bidders into the fray.

Consumers who thought the underquoting rules were there to protect them didn’t realise the new rules were so easily exploitable.

Agents have a few predictable excuses to fend off criticism –

The vendor blindsided us with a high reserve on the day of the auction

The market for this home was stronger than anticipated

Our guidance was in line with other properties on the market (which were also underquoted).

Agents didn’t begin underquoting by 20% universally across the board. But it just takes one to break from the 10% rule and underquote by 20% to distort the entire market.

The other agents are then inadvertently forced to match the 20% underquote to keep their own listings competitive in the marketplace.

As an aside, anyone who thinks a $10,000 advertising campaign paid upfront to the agent is what attracts home buyers has no idea how ‘the game really works’.

Let’s keep going though some real and recent examples of how the 20% underquote plays out:

• Barry likes a property with a Guide of $1,900,000 to $2,000,000,
• The agent says the owner is not ready to sell prior to auction, but attend the auction
• Barry attempts to make the first bid at auction, at $1,900,000
• The auctioneer snarls at Barry, we won’t be accepting any bid under $2 million
• Poor Barry says I am bidding the price you have told everyone for the last 4 weeks
• The auction crowd laughs at Barry, literally
• When the property passes in for $2 million, Barry is told the vendor’s reserve is $2,300,000.

Thankfully Barry is not shocked by events. The last time he bid with this agent, the property achieved 20% above the Price Guide.

Angela was shocked when an appealing cottage she bid on, quoted at $2,200,000 sold for more than $2,800,000.

Angela’s shock became fury when advised that multiple agents had valued the property well above $2,550,000 before it went to market. The $2,200,000 was nothing more than a complete ruse to entice bidders into the agent’s web.

Not every auction guide is underquoted by 15%-20% below the vendor’s reserve.

Many agents are savvy enough to know, the more you underquote, the more prospective buyers you alienate in the process.

The agent that lies and misleads buyers to make a sale this week, is going to do the same next week. Understandably many agents don’t want to be tarred with this dirty brush.

As a consumer though, it’s worth watching many auction campaigns, with a variety of agencies, before actively participating.

In time, the style and manner with which these auction campaigns play out will differ from agency to agency and become illuminating in the process.

Unfortunately, it is obvious that the regulators have lost control of the underquoting scourge. If you are buying and selling in the same market and list your existing property with a firm that blatantly lied to you whilst you were buying, then you are unwittingly fueling the problem.

If all of the above seems unduly complicated and time consuming, rest assured, it is. As they say in poker, if you cannot spot the sucker at the table, then you are it.

If swimming through the murky waters of the auction system is not for you, take professional advice or outsource to a professional. The meteoric rise of the Buyer’s Agent in recent years is hardly a surprise given the conduct of many Seller’s Agents.