From 1 January 2016, New Laws Prohibiting Real Estate Agents from Engaging in a Practice Called Underquoting Apply to the Sale of Residential Property in NSW.
It had, allegedly, become the practice of some real estate agents to underquote and get buyers interested in purchasing a property. The confident buyer would then spend a small fortune on building and pest reports, strata inspection reports and legal advice only to learn after the property had sold that that they weren't even in the race to buy the property – most likely because the agent had given them a price lower than the agent’s estimated selling price.
In his Second Reading speech on the Property, Stock and Business Agents Amendment (Underquoting Prohibition) Bill 2015, the Hon. Victor Dominello Minister for Innovation and Better Regulation said:
“If a property price guide is artificially low, people spend money on building and pest inspection reports or strata reports, believing the property is in their price range. Estimates of the total costs involved range from $250 to more than $1,000 per property; and if this happens to the same people for a number of properties these costs can mount up”.
The amendments to the Property Stock and Business Agents Act 2002 (the Act) provide greater protection to purchasers of property by prohibiting real estate agents from engaging in the practice of underquoting.
What is underquoting?
When a person chooses a real estate agent to market and sell their property, they enter into an agency agreement with that particular agent (the agent’s written contract with the seller). A real estate agent is not able to enter into an agency agreement with a person for the sale of residential property unless the agreement includes the agent’s estimate of the likely selling price of the property. Underquoting is when an agent states or publishes a property price that is lower than the agent’s estimated selling price in the agency agreement. This can cause buyers to waste time and money preparing to buy a property they can’t even afford.
What is the Estimated Selling Price?
For a residential property, the estimated selling price means the price or price range specified in the agency agreement for the sale of the property as the agent’s estimate of the likely selling price of the property. This estimate may be expressed as a price range, but only if the highest price in the range does not exceed the lowest price by more than 10 percent of the lowest price (so an estimate expressed as $500,000.00 - $540,000.00 is ok but one expressed as $500,000.00 - $560,000.00 is not.)
When happens if an agent commits an underquoting offence?
Agents who commit an underquoting offence may be fined up to $22,000 and could lose their commission and fees earned from the sale of an underquoted property. The Hon. Victor Dominello, in his Second Reading speech, said that there have been no successful prosecutions under the Act since the inception 13 years ago. It will be interesting to see whether the amendments alter this position.
How do the changes regulate real estate agents?
- Revision of estimated selling price if no longer reasonable
Agents have a continuous obligation to ensure their estimated selling price remains reasonable. Section 72A(4) of the Act provides that a real estate agent must ensure that the estimated selling price is revised if it ceases to be a reasonable estimate of the likely selling price of the property (if the market changes, for example) by amending the agency agreement and notifying the vendor in writing of the revised estimated selling price.
- Evidence in support of estimates
A real estate agent must provide the prospective vendor with evidence of the reasonableness of the estimated selling price. This evidence (for example details of comparable sales) must be provided either before or at the time they specify an estimated selling price and each time an estimated selling price is revised. NSW Globe, an initiative of Land and Property Information, allows the public to view and download current and historic property sales information for free at an individual property, street and suburb level. The availability of this service will reduce the cost to agents of preparing comparable sales reports in support of their estimates. Section 74 of the Act provides that the Director-General may require an agent to provide evidence of the reasonableness of any estimate of the selling price made by the agent in a statement orally or in writing.
- Underquoting in advertisements
Agents must not publish an advertisement in relation to the sale of a residential property that indicates or suggests a selling price for the property that is less than the estimated selling price.
- Underquoting in representations
A real estate agent acting pursuant to an agency agreement for the sale of residential property, or its employee, must not represent to a prospective buyer that a residential property is likely to be sold for a price that is less than the estimated selling price for the property. In addition to the maximum penalty imposed in section 73A(1) of the Act ($22,000.00), a person found guilty of this offence may be ordered to pay the commission they have received in relation to the sale to the Compensation Fund.
- Wording of advertisements
Agents must no longer use phrasing like ““offers above” or “offers over” in advertisements in relation to the sale of a residential property. Plus symbols (+) are also not allowed – so a listing that reads $800,000.00 + is a no no!
- Record of quotes
Each time an agent makes a statement in the course of marketing a residential property (whether the statement is to a prospective buyer or seller) that the property is to be sold for a specified price or within a specified price range, the agent must keep a written record of the statement. The record must contain the address of the property concerned, the price or price range quoted and the date and time of the representation and it must be kept at the agent’s principal place of business for at least three years. Not making a record is an offence with the maximum penalty being $22,000.00.
The amendments to the Act provide clarity about when underquoting occurs. Hopefully, deliberate underquoting is vanished forever. Agents should be aware of the extreme importance of keeping detailed records. In any prosecutions, the records the agent has kept will provide the main source of evidence so it is vital that agents ensure their estimates are reasonable, that their quotes accord with their estimates and that file notes are made contemporaneously.