When it comes to selling property we’re a pretty odd bunch here in Australia. You know what, that’s probably unfair to most of the rest of the country. More specifically, we’re an odd bunch here in Melbourne and Sydney. We have an incredible preoccupation with property values that seems burned into our psyche. Where this fascination stems from I couldn’t’ tell you but, I have often wondered if it has in any way contributed to another lamentable idiosyncrasy of our property markets – underquoting.
Underquoting is a “strategy” relatively unique to Melbourne and to a slightly lesser extent Sydney. For those of you blissfully ignorant of the technique it is, simply, advertising the price of a property at a figure significantly below what the owner is really prepared to sell it for. In terms of a pricing strategy. I’ve not encountered its equivalent used anywhere else in the world for any other product or service. It is illegal in Australia to underquote. New regulations and penalties were introduced in May 2017. Despite this, the practice remains widespread.
I maintain that the rationale for using this approach, which to be frank most people using it can’t actually articulate, is a logical fallacy. That is, knowing the minimum price a seller requires to sell their product, buyers are less likely to pay above that figure. Therefore, when the “reserve price” is unknown, buyers will pay a higher sum – post hoc, ergo, propter hoc! However, this disregards entirely the notion of competition in a supply and demand context, which indisputably disproves the strategy. A real estate agent’s primary objective when selling a property is to generate competition – you need only two buyers with interest and capacity to deliver a result.
I’ve asked people at the highest level of this industry to explain to me, in a theoretical context, how revealing an owner’s reserve price negatively impacts the opportunity to achieve a sale price above that figure, presuming that figure is not astronomically beyond market expectations. And they can’t. Because it doesn’t.
Why then does underquoting persist?
To suggest it is simply a matter of habit would be to oversimplify the issue. Agents and sellers, if they even consider the alternative, are scared of what might happen should they advertise their property in line with the price they truly want to achieve. They’re scared that no one will believe that is the “real price” (or price range) at which the seller is prepared to sell. They’re scared no one will come to inspections, make offers or bid at auctions. Why? Because buyers know and now expect agents to underquote. So, when a buyer has a budget of $700,000 they’re not looking at properties advertised at or up to $700,000. They are arbitrarily guessing how much under the range estate agents are quoting properties, and adjusting for that. The problem with this is that not all agents are underquoting. And not all agents underquote to the same extent. Some are miles under, and some are just a sneaky bit under (I’ll remind you – this is illegal). As a result, there will be instances when a buyer doesn’t even consider a property that sells within their budget because the overestimated how much the agent underquoted the property. On too many occasions we’ve had buyers tell us they would have bought a property we’ve just sold if they knew it would sell in the range we’d quoted.
In 2015 Caine Real Estate ran a campaign of advertising reserve prices for all of our auction properties. Every single one of those properties sold above the reserve price. Yes, we are excellent at our job. But while that fact might have helped achieve incredible results (super incredible), our real success with this initiative was removing confusion from the process. We created a transparent framework in which the buyers understood the seller’s minimum price expectation and that fostered competition. Don’t forget that a reserve price is the absolute minimum price a seller will take – their “walk away” point. Of course, they want higher than that, and if the real estate agent has done their job they’ll get more than that. When I list my Xbox on eBay for $0.99, because my wife thinks games are dumb and my kids are always watching the television anyway, I want more than $0.99 for it, and I expect more. But worst case, if that’s all there is out there I’m selling and thems the breaks – no regrets.
Despite the success of our “advertising reserve” campaign we were forced to discontinue it…. we just couldn’t get owners to agree to it.
Underquoting has ripped the fabric of our property markets, miring them in confusion, mistrust and oftentimes anger. This quagmire was cultivated by estate agents, with nervous sellers now unwittingly complicit in perpetuating it. But it doesn’t have to be like this. Now is the time to make a change, as the market adjusts from the unsustainable growth of the past decade, into a market that demands skilled negotiators, hard workers, and above all transparent and truthful communication with buyers and sellers.