With the residential property real estate bubble appearing to rapidly re-inflate, the focus has once again shifted to real estate agents and allegations of “under-quoting”. In Melbourne, Australia’s auction capital, Consumer Affairs officers recently raided sixty estate agents, centered in the city’s northern and western suburbs, such as Brunswick, Clifton Hill, Coburg, Craigieburn, Essendon, Pascoe Vale, Point Cook and Werribee.

The rationale for the raids was an investigation to probe the situation where an agent claims a property is expected to sell for a specific sum (often below the “reserve” level which the vendor would sell the property), in order to encourage a large number of potential purchasers.

The raids drew an angry response from Enzo Raimondo, the chief executive of the Real Estate Institute of Victoria. Writing in The Age, Raimondo launched a strong defense of agents, claiming:

In a rising market the estate agent may wrongly estimate the sale price, but that does not change the fact that the vendor is pleased because he got a great price. The successful purchaser is pleased because he thinks he got a great home at a fair price.

The underbidders may be disappointed because they did not secure the home they wanted at the price they wanted but that alone doesn’t prove the estate agent or vendor has done the wrong thing; it just shows how auctions work.

This is where Raimondo (and some agents) fail to see how their actions can cause undue hardship and pain for (often young and naïve) homebuyers.

There is nothing wrong with an estate agent making an innocent mistake and under-estimating the final sale price, especially in a rising market. However, what frustrates purchasers is the situation where a property is quoted for a specific price but the reserve price (that is, the minimum price which the vendor will accept) is above that level. The agent is aware of the reserve price at the time they provide an estimated price range for the property (in many cases, the agent plays a role in devising the reserve price) and therefore, are acting in the full knowledge that many potential purchasers will not be able to purchase the property.

Those potential purchasers will end up wasting time and money inspecting the property, undertaking the necessary legal formalities and obtaining necessary finance approvals. Not to mention the emotional hardship which buyers suffer on missing out on yet another property which significantly exceeds their budget.

The solution to the problem of under-quoting is dreadfully simple. Instead of relying on estimates from conflicted real estate agents (whose sole motivation is to achieve the highest possible sale price, thereby earning the largest possible commission for themselves), agents should be required to simply list the “reserve price” of the vendor. The reserve can change as the sale process continues, however, potential purchasers must be kept fully informed at all times of the vendor’s current reserve. At auction, bidding should commence at the reserve price. This will remove the need for agents to exercise expert “judgment”, and allow purchasers a full idea of the minimum amount required to acquire the property.

Meanwhile, it’s also worth viewing this Media Watch piece from last month which shows how the REIV (the body run by Raimondo) pressured Fairfax (using its large advertising spend) to remove an article and various posts accusing real estate agents of under-quoting to purchasers and over-quoting to vendors.

If the auction system is as fair as Raimondo claims, one wonders why the REIV went to such lengths to ensure Fairfax removed an article which argued the contrary.