CHOICE membership

Buying a home

In the past two months, my daughter and her husband have been looking for a property in Victoria to purchase as their home. I have accompanied them in this process and would like to comment on our experience.

  1.  Underquoting.
    

We understand that underquoting is illegal in Victoria. But our experience indicates that it might still be operating. Specifically, my daughter and her husband were interested in two townhouses which were up for auction. Both properties were not sold during their respective auctions. For each of these two properties, my daughter put in a private offer close to the top value of the original quoted range, but was only told the vendor was now looking for a price above the original range. Since our offer was close to the top range, we thought it must be above or close to the original reserved price and so we should be able to get the property. But it seems that we were too simple-minded. We were wondering how the price could have gone over the original quoted range in a short period of time. Although our experience is not exactly the same as what is reported in a recent ABC News article on underquoting (please see https://www.abc.net.au/news/2019-12-30/are-real-estate-agents-underquoting-hot-property-market/11829060), our sentiment is certainly similar.

  1.  Auction.
    

We feel that auctions are really buyers’ minefields, primarily because there is no cooling-off period. The point is that many buyers (like my daughter and her husband) cannot afford to pay and have the contracts and properties checked before the auctions for every property they are interested in. So they would need to go into some auctions ‘blind’. Also, it seems that many auctions start the bid at a low price. To us, the starting bid should be the reserved price because this is the minimum price at which the vendor is willing to sell – why waste everyone’s time at bids which the vendor will not accept. Also, to be fair to the buyers, if the highest bid has reached or gone over the reserved price, then the highest bidder should get the property. But, currently the reserved price is not disclosed and so I suppose the agent could go in and change the reserved price with the vendor without anybody knowing. So the whole process lacks transparency.

  1.  Certificate of property worthiness
    

When a car is sold, the seller needs to prove that the car is road worthy such as producing a road worthy certificate. Why don’t we have a similar system for selling properties? Instead, currently it is up to the buyers to find out whether there are any problems with a property. So each interested party will need to individually pay someone to inspect a property. It is possible that multiple inspections are done on the same property – a clumsy process. Wouldn’t it be much simpler and much fairer to the potential buyers if the seller was required to produce a certificate to show that the property is fit to live in and has no major issues?

I have requested CHOICE to look into these issues. Hopefully they can do something. In the meantime, are there anyone who have similar experiences to share or comments to make?

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Welcome to the forum @hpy and yours is a salient post about the real estate business as practised across Australia, albeit with minor variations between states.

An old saw is ‘Welcome to Australia, owned and operated by property developers’ and what you experienced is the inevitable outcome.

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Interesting post with some excellent points.

I’ve never been to an auction with any intention to buy (spectator at a couple), nor have I ever sold at an auction - for much the same reasons as listed but in addition my perception that the manic circus an auction can become (by intent) to me seems like a fusion of deception (even if by omission), predatory behaviour and greed …

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This happens, at least in NSW. The vendor sets a reserve with the agent before the auction who communicates it to the auctioneer. As the reserve is approached the vendor has to decide if they will stick to it. If they do as soon as the reserve is reached the auctioneer will announce ‘the property is on the market’. From then on the reserve is defunct, the highest bidder gets it. However before that if the vendor is feeling like the bidding is very strong they can raise the reserve during the auction. There is no requirement for any change to be announced and it probably would not be.

I do not see what is wrong with that situation. The buyers are not compelled to declare how high they are prepared to bid. This is a dynamic situation. All those involved need to stay aware of the position and make their own decisions on the fly. This is the same as private treaty negotiations in that neither side want to give away their limits, though it happens much faster at auction. If you can’t stand the time pressure don’t go to auctions.

The auctioneer can suggest the starting bid but nothing happens until somebody actually bids. It is usually the bidders who start lower than where the auctioneer wants it not the auctioneer’s choice.

Starting low and building up has been the dynamic since auctions were invented. It is part of the process of the bidders getting to know how strong the market is and identifying the competition. As mentioned it is also where the vendor gets a better feel for what the property will go for as before the auction bidders are usually cagey about it.

Sure the competitive crawl up the scale is part of the psychology of getting people to part with the maximum amount of money. If you are emotional person who will get flustered or go past your limit in the heat of the moment then get somebody else to bid on your behalf who has a cooler head.

I can’t agree with starting at the reserve for reasons given above but also because it would mean you can never get the sale below reserve during the auction. If the vendor has set it too high they can lower it during the auction to make the sale, you would rule that out.

An auction is probably the fairest way to find the real market price of a property. At least the bids are all public. The private treaty sale process can be manipulated by the unscrupulous agent by telling competing buyers that somebody else has offered more and they will have to up their offer to get the property. The competing offers may all be in the agent’s head. All this is conducted in secret and if it is illegal or at least unethical it is very hard to prove.

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It does make sense, but rather than a worthy certificate, maybe a building inspection commissioned by the vendor and made available to potential buyers. This has two advantages, the first the building inspection condition is removed from contracts providing greater certainty to both the vendor and buyer…and the buyer before entering a contract knows condition and what they are getting into.

This would only work if the inspectors are honest and totally independent of the vendor and agents. Recent building certification failures indicates that the inspection process may not be corrupted or fail safe… …however, this could be sorted through regulations and auditing.

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Having been in the US system much of my life the private treaty is the norm there. Houses usually go on the market for a fair price on the high side and are open to offers. Most sell under their asking price after a negotiation but some are subject to the equivalent of silent bidding in hot markets or for a particularly attractive property.

In the US there is the ‘multi-listing’ service where virtually all houses on the market are listed regardless of agent. The agent who lists gets half the commission and the agent who sells gets the other half. It makes it very easy to see what is about since every agent can sell almost any home, although in rare cases the listing subtly states there is no co-arrangement and a buyer has to go to the listing agent. That seriously reduces market exposure so it does not happen often. Contracts can be subject to an acceptable inspection post acceptance; significant negatives can result in the offer being changed or withdrawn.

It works there and it is fair because the seller can sell at whatever price they wish to, and the buyers know when something is obviously out of their reach so they don’t waste time or money chasing it. As for setting market value? Since all homes are represented at mostly realistic prices the market value in an area becomes self evident.

For an auction a counterpoint argument is cashed up buyers who have no need to consider their financial situation are happy and able to pay $millions, tear a house down and rebuild just because they can. Some see the increasing prevalence of that as a reason our real estate prices are so outrageous.

edit: I’ll add that in the US sold prices, tax amounts, school information, and most salient points are freely available on listing web sites. A national site is Zillow.com as an example that serves sellers / agents, buyers, and renters and landlords.

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As @phb notes, this requires a degree of integrity not yet assured. It would be an efficient way to go if the inspections were reliable, however when something is missed by the inspection, and becomes evident later, is there a liability?

Note, a building inspection does not usually cover electrics or plumbing. The theory is all electrical (plus tv and internet and coms cabling), plumbing and even roofing work requires a registered trades person. Hence such items are expected to always be compliant and in proper working order. Experience as a purchaser has sometimes revealed otherwise. The added cost to have these reliably checked may see most purchasers, including us not go that far. If a single inspection and certification scheme does come to be, it should include these areas of a property as well. The catch, some of what might be non compliant is well hidden?

NSW has an interesting requirement for agents to be aware of any inspections or reports that the owner has commissioned. It’s a little loose as the obligation relies on the seller to inform the agent.

Note:
We have previously paid privately for an inspection from a reliable inspector of each of our home before selling and moving on. We have not been under any obligation to share these. They have ensured we can deal with any major items in advance, rather than risk a failed sale. It’s also useful in identifying minor issues that might hold back a prospective buyer. Any rectification work is still a matter of cost vs benefit.

No doubt there are those sellers who simply hide defects as best they can. A properly carried out building inspection in our experience will see past most if not all.

Some buyers regardless have unrealistic expectations of older homes. Easily spotted when they make a low offer arguing the need for replacing everything that does not appear or function as new. Bargain hunters, should have purchased a new home might be apt.

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Most accurate maybe, but whether it is the fairest might be debatable - especially given the situation with vendor bids in most states, both the ones that come under the law, and those the auctioneers regularly plucks out of thin air …

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Why is that unfair? The buyer can just ignore it if they are not prepared to go higher, like any other bid.

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One argument against auctions is that there is only one real winner assured.

The agent and auctioneer. They make a fee sale or no sale.

As opposed to overheated auction sales are those with only one or two interested buyers always above board?

While “the Market Value” is a well used term in property valuations, ‘a fair price’ might be a little harder to define otherwise.

How many properties are sold at well below a reasonable assessment of the market value due to xyz reasons?

How many properties if reality TV is to be believed are purchased at auction for below valuation, given a cosmetic make over and flipped for a much greater market value? Some say spending $50,000 on a property adds $100,000 of value to a later sale. Buying a property at a significant discount due to vendor’s financial distress, ignorance or pressure to move jobs etc. To some this may not be fair, although the price will be what the market will offer on the day.

Note:
With an average (ABS) of more than 3.2 bedrooms per dwelling and only 2.6 residents; should we be calling property investment for what it is. False value and fake wealth. If to be sustainable Australia stops increasing it’s population what next?

https://www.abs.gov.au/ausstats/abs@.nsf/mf/4130.0

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The auctioneer’s fee is relatively small, it varies but typically we are talking under a thousand dollars not many thousands. Depending on the market the clearance rate may be very high, such as over 80%, so mostly there is not that much money go to auctioneer fees for no sale.

In my experience the agent only makes a commission if there is a sale. Especially in the booming big city markets that may be significant but it doesn’t matter if there is an auction or not, the percentage is contracted beforehand. This is not counting advertising costs which may or may not be incurred by either method of sale.

You also assume that auctions do not fulfil their stated purpose of getting the maximum number of potential buyers together and so maximising the selling price. This may not be good for buyers but it is good for vendors. Do agents favour auctions - particularly in hot markets? You bet they do as it increases their commission. Will an agent advise against an auction if the market is not suitable and private treaty will do better? Yes for the same reason.

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We’ - Which we??

Longer term what is the average auction clearance rate nationally? I thought the bench mark was around 50% with the doldrums being nearer to 25%.

The good with the bad?
Not to forget the agent’s marketing profits. Or are this without markup?

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Quibbling much?

You are ignoring the major part (by dollar value) of your claim that the agent got their fee anyway which is not so. You are also ignoring that vendors benefit from the choice of auction which is a good reason that

"there is only one real winner assured.

The agent and auctioneer. They make a fee sale or no sale."

is not the case.

Re the comment about the reserve price: “I do not see what is wrong with that situation.” Well, I think what is wrong is that, by not disclosing the reserve price, the situation lacks transparency, In fact, I think the reserve should be disclosed at the time a property is advertised for sale. The current practice is to advertise a price range, which I suspect many sellers have no intention to honour. The wastes many people’s time and energy when they try to pursue a property which is beyond their budget right at the start without their knowledge.

Re the comment: “Starting low and building up has been the dynamic since auctions were invented. It is part of the process of the bidders getting to know how strong the market is and identifying the competition.” I can’t see why starting the bid at the reserve cannot achieve the same thing.

Re the comment: “I can’t agree with starting at the reserve for reasons given above but also because it would mean you can never get the sale below reserve during the auction.” Why not? If the bid starts at the reserve price and no one bids, then the seller will know that the reserve is too high. At that point, the agent can discuss with the seller if the reserve should be lowered to enable the possibility for the auction to go ahead. In that case, it is possible for the property to be sold below reserve during an auction. But of course the seller may not agree and may want to switch to private sale.

Also I’d like to reiterate my biggest criticism of auction, which is that there is no cooling-off period. With a private sale, the buyer has some time to check the property after the agreement of sale and so still has the chance to back out if some major issues are identified. With an auction, why aren’t the buyers given the same opportunity?

I agree with you, phb - by ‘certificate’, I meant exactly what you said. As for the comment: “This would only work if the inspectors are honest …”, I suppose this is the case for any business transactions - we rely on the honesty of all parties concerned (both the sellers and the buyers). However, as we know, not all people are honest and so we need to rely on appropriate laws and regulations to manage the process.

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Then to be fair the bidders ought to each disclose their maximum bids. This is rather silly isn’t it. The way auctions work is that you discover the players’ limits by conducting the process, participants have the right to protect their position until that process takes place because revealing their position beforehand weakens it.

If you are complaining about underquoting that is a separate matter. Forcing vendors to reveal their reserve is not a sensible solution to that problem. Say this rule is changed, do you then want to take away the vendor’s right to raise the reserve during the auction too? If you don’t then what is to stop a vendor publishing a low reserve initially and then jacking up it during the auction? The buyers would be no better off. It makes no sense.

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I agree with you that the Reserve price is the owners choice to publish or not. During an Auction the Auctioneer may disclose if bids are below the reserve (it is a tool they can use to get further bids). Owners may be happy to disclose the figure at which reserve will be met during an auction, or they may not. It is a choice and should remain so. After all the owner is the one who is paying for the Auction to be undertaken and definitely not the bidders.

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Potential buyers can also carry out building inspections as part of pre-auctiion due diligence. Why not carry out one rather than every potential buyer carring out their own?

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There are quite strong pro and anti-auction related opinions. If auctions are fair and maximise value I thus wonder why we are not subject to auctions for clothing, groceries, medical care, and entertainment, … , and … .

Years ago in the times of everyone using data centres, some of them allowed their customers to bid for each execution of their application by adding a percent extra they were willing to pay for expedited services, so there is a historical precedent.

Part of the debate comes down to a life view of whether auctions are best for an individual and society, just society, or just an individual, and why real estate has evolved to be special in some markets like Australia, the UK, and probably some others with British heritage, but not others. Auctions seem to me as part and parcel of a totalitarian gig economy where all us participants are essentially playing the equivalent of hunger games 24x7.

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A family member recently bought a house in the USA. It was previously inspected by a potential buyer who was trying to get a low-ball. When my family member came into the process they serendipitously rang the same inspector who revealed he had recently inspected said property and provided the results at a good discount. Win-win. I see no reason a certified and overseen role of ‘official surveyor’ could not be enacted and the reports sold to all interested comers at less than an individual inspection price. Of course it is not so simple because some properties might have no interest and others significant, so some inspections could be veritable financial gold mines and others complete losses.

Requiring the vendor to fund a report seems equally appealing, although they would not want to except under duress if there were serious issues needed addressing. But for such a large investment by a buyer should such things be withheld?

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