“Erick, we have checked out some of the properties and we can definitely afford to buy in this suburb,” insisted the wife of a married couple, who are both first homebuyer clients of mine. I then responded, “I’ve researched the recent sold prices of properties in the suburb and it is unrealistic for your budget. Did you check the sold prices or the advertised prices?” “Advertised prices,” my clients replied.
Now here is the problem.
In an auction city like Melbourne and Sydney, the advertised price and the sold price can be very different. When a buyer is new to the buying process, he or she will usually be surprised to learn there is a gap there between advertised price and what the seller will sell it for. Many buyers who have been “tricked” into thinking the advertised price range will be what the property may be sold for will readjust their expectations when they conduct their research or after they lose out at the auction bidding. And they have to learn fast. They usually add on a certain percentage extra on top of the top range. As the likely selling price can vary between 5-30% from the top range, this is actually a tricky task.
In the previous issues, I discussed the other five major areas where homebuyers and property investors will find traps in their property-buying journey: location, representation, advertisement, ‘staged’ property and contract of sale. In this issue, we look at one of the most confusing of all – the price of the property.
Underquoting is rampant in the blue chip suburbs and in particular properties which are sold via auction campaign. In a nutshell, when a house with a fair market price of $750,000 is advertised with a price range of $600,000 – 650,000, that is underquoting. Underquoting by specifying a significantly lower price-range knowing that the property will sell for much more is a common tactic used by real estate agents to bait interest and competition, leaving hopeful buyers wasting time and money on pre-sale reports and solicitor’s fees in perusing contracts. I have known a medical doctor homebuyer who had been trapped by agents’ endless underquoting games for almost 2 years until he was so fed up and decided to overpay to end the buying process once and for all. Although Consumer Affairs Victoria warns buyers on the practice of underquoting, in reality this practice is hard to police and the pricing system is open to abuse. The onus is on the buyer to navigate the underquoting minefield and figure out what fair price to pay for a property. It is far too easy for buyers to be manipulated to pay more due to emotion, scarcity of time for research and sometimes, ego.
While underquoting has taken the spotlight in many real estate discussions, overquoting practices are surreptitious and they are designed to trap unsuspecting buyers who are often used to underquoting. If a buyer is not careful, he or she will assume the price is underquoted and pay much more than what the property is worth. Some agents will come out with all sorts of excuses to justify the overquoted price. They claim that the market price paid is between a willing buyer and a willing seller, even it is significantly higher. In some listings, the overquoting is designed to allow time to condition the seller’s expectation down throughout the auction campaign.
Different Price for Different Buyer
Buyers may sometimes be surprised to find out that they may be quoted a different price from other buyers for the same property. This is called two-tier pricing and it is illegal. This practice can be found in certain off-the-plan properties and it is difficult to police because it usually happens at overseas property road shows. A Docklands apartment that is marketed in Melbourne for $580,000 is priced at $770,000 in Shanghai. It is almost a $200,000 mark up. Many overseas buyers do not conduct the much needed due diligence on their property purchase hence they may fall into the trap of two tier pricing.
Property Price Playing Hide & Seek
In the second-hand property market, some online listings have no price listed. This occurrence can sometimes be almost 50% of the listing of a particular suburb. This means that buyers have to take extra efforts to make a phone call during reasonable hours of the day to enquire on the price if the property fits into their budget. Depending on agents, some may take up to two days to respond to a price enquiry and there is a minority of agents that will not reply any enquiries at all. Some agents are notorious for not calling back buyers or replying emails. As a buyer’s advocate, I am used to this. However, my main concern is when there is no price listed, it allows the agents to quote a different price to different buyers. Also, different prices can be obtained from different agents of the same property. Recently, I looked at a 4 bedroom townhouse listed in Balwyn North at Lansdown Street which is about 500m from the popular Balwyn High School and had an online advertisement with no price. The first agent I rang quoted me $950,000 plus. I rang the second agent and the price was $1,000,000 plus. So which one should I listen to? None, of course.
There are many more tricks and traps in the pricing of real estate than the ones listed here. To combat the misleading price games, ideally we do not have to look at the price quoted by the agents and just conduct our own price research based on comparable sales. It is therefore crucial for a buyer to do in-depth due diligence, or hire a consultant who can do the job. Otherwise, he or she may be paying the ‘price of the inexperienced’.