Under the Hammer: The Epidemic of Underquoting

WHILE REAL ESTATE AGENTS (both commercial and residential) must act fairly and honestly when advertising property, there is no doubt that underquoting is a significant problem -- predominantly in the current Melbourne and Sydney real estate market.

Although the New South Wales Government has recently proposed legislative reforms in order combat this problem, Victoria is yet to follow.

What is Underquoting?


Underquoting occurs when real estate agents understate the estimated selling price of the property, therefore resulting in greater interest in the property.

As you can appreciate, it is misleading because it dupes interested buyers into believing that a property will be sold at a price that is less, than the price at which the vendor is prepared to sell.

The Current Law in Victoria

In Victoria, real estate agents are governed by schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA), the Estate Agents Act 1980 (Vic) (EAA), and the Estate Agents (Professional Conduct) Regulations 2008 (Vic) (EAPCR).

Under the CCA, real estate agents must not engage in conduct that is or is likely to be misleading or deceptive. Real estate agents also cannot make false or misleading representations in relation to the price of a property. Breaches of the CCA may result in a fine of up to $220,000 for individuals and $1.1 million for corporations.

Furthermore, the EAA prohibits real estate agents from:

  • publishing or causing to publish false or misleading publications; and
  • advertising or continuing to advertise a property at a price that is less than the seller's asking or reserve price or the agent's estimated selling price.
    (The agent's estimated selling price is based on the agent's expert knowledge assessed by market conditions. It is the price that a willing, but not anxious buyer is prepared to pay.)

Each breach of the EAA may incur a fine of up to $30,334.

Finally, the EAPCR imposes a range of duties on real estate agents. Under the EAPCR, real estate agents must:

  • act fairly and honestly within their knowledge and ability;
  • communicate all offers of a property to the vendor and follow the vendor's lawful instructions; and
  • exercise skill care and diligence.

Each breach of the EAPCR may incur a fine of up to $3,791.75.

While these laws appear strict, it is clear that the issue of underquoting continues to be a significant and growing problem in the current Melbourne real estate market, with many properties being advertised at prices exceedingly lower than their expected and actual selling price.

According to the Reserve Bank, Australian house prices are at least 30% undervalued, which is the widest gap in three decades.

Furthermore, according to Consumer Affairs Victoria, inserting the words "plus", "in excess of", "from" and "offers over" a specified price, when advertising a property, is considered misleading -- because the vendor expects the property to sell for more than the advertised price and no information is provided to prospective buyers about the extra amount required for the offer to be considered.

However, there has been no legislative change or judicial ruling in Victoria, prohibiting these phrases which, has permitted real estate agents to take advantage of them when advertising property prices.

Reform is Urgently Required

It is clear that the current underquoting epidemic that predominantly exists in in Melbourne and Sydney needs to be addressed. Currently, there are no proposed reforms being introduced in Victoria to combat this issue.

However, the New South Wales Government has attempted to address the problem of underquoting by introducing Property Stock and Business Agents Amendment (Underquoting Prohibition) Bill 2015 in order to amend the Property Stock and Business Agents Act 2002 (NSW), which currently governs the conduct of real estate agents in New South Wales.

These reforms will commence operation on 1 January 2016 and will:

  • Prohibit real estate agents and agencies from:
    • entering into agreements with a vendor for the sale of their property unless the agreement includes the agent's estimate of likely selling price, which must be reasonable and must also be revised if changed;
    • publishing an advertisement that indicates or suggests that a selling price for a property is less than the estimated selling price;
    • using the phrases "offers over", "in excess of", "plus" and "offers above" a specified selling price; and
    • making a representation that the property is likely to be sold for a price other than the estimated price;
  • Require real estate agents to keep records of quotes; and
  •  Impose penalties, by way of a fine, on real estate agents and agencies who breach the provisions.

While the effectiveness of the reforms in combating underquoting are yet to be determined, they are a step in the right direction to establishing a more transparent market for prospective buyers.

In addition to the above reforms in New South Wales, both the Victorian and New South Wales Governments could introduce further changes in order to eliminate underquoting in the property market. These changes include:

  • increasing investigations and prosecutions of real estate agents and agencies who engage in underquoting;
  • imposing harsher penalties on real estate agents and agencies who breach the law;
  • requiring property managers and real estate agents to engage in continuous education about misleading and deceptive conduct and in particular, underquoting;
  • requiring real estate agents to include a valuation in the agency agreement and only be permitted to quote this figure when advertising the property; and
  • prohibiting vendors from being able to increase their reserve price at the last minute at auctions. Real estate agents should be required to publish their reserve price in their auction advertisements and make the reserve price the highest point, whereby it may be lowered during a campaign but not increased.

Bottom Line: It is clear that underquoting is a serious problem in the Australian property market and in particular, in Melbourne and Sydney.

In attempting to avoid being a victim of underquoting in the current market, prospective buyers should:

  • extensively research the market value of the property;
  • use the agent's estimated selling price only as a guide; and
  • ask the agent to justify the advertised price and reserve price the day before an auction.

Disclaimer: If you think a similar situation may apply to you, then you should contact us for detailed legal advice relating to the particular facts and circumstances of your property or lease agreement. This article is not intended to provide such detailed and specific advice. And, you should not act on the basis of any matter contained in this article without first obtaining more comprehensive professional advice.