On 8 September, 2015, new laws were introduced into NSW Parliament to change real estate practice. The new laws will protect home buyers from being misled by real estate agents underquoting the likely selling price of the property, particularly for sales by auction.
The Property, Stock and Business Agents Amendment (Underquoting Prohibition) Bill 2015 was introduced to replace the existing law which had proved difficult to enforce.
The new underquoting laws are specifically designed to protect residential home buyers from price-baiting. This occurs when buyers are lured to attend an auction by a low price estimate, only to find the winning bid is much higher, well above the buyer’s price limit.
As a result, many home buyers are left out of pocket for the money they outlay for pre-purchase inspection reports when ‘looking for their dream home’, not to mention the time and energy they waste in looking to buy a home that is not affordable because the likely price has been underquoted.
The new laws apply to private treaty sales as well as to auction sales.
The new laws will change three aspects of real estate agency practice:
- Listing the property – the estimated selling price in the Sales Agency Agreement
- Marketing the property – restrictions on price advertising
- Record to be kept of selling prices quoted
Listing the property – the estimated selling price in the Sales Agency Agreement
The most important question that an owner will ask the real estate agent before listing their property for sale is: How much is my property worth? The first question that a prospective buyer will ask the real estate agent is: How much will the property sell for?
The selling price is therefore the key to selling property in today’s market.
Many estate agents will say that it is the owner’s prerogative to set the selling price, after a price discussion. This is true, but the new laws will require the real estate agent to exercise their professional judgment to estimate how much they expect to sell the property for and to back it up with a written report. And most significantly, once they set the estimated selling price, the real estate agent cannot advertise the property for sale at less than that price.
Specifically,
- The Sales Agency Agreement must include the real estate agent’s estimate of the likely selling price of the property, like a market appraisal. It can be a fixed amount or a price range with a ‘spread’ of up to 10%. For example, the price guide could be $880,000 or in the range $800,000 - $880,000.
- The real estate agent must provide evidence of the reasonableness of the estimated selling price to the seller before signing the Sales Agency Agreement. This evidence will need to contain details, such as the condition and features of the property, reference to sales of comparable properties, and be in the form of a written report. The report will be more appraisal than formal valuation, in terms of detail.
- If the need arises to update the selling price because of new comparable sales data or buyer feedback during the marketing campaign, then the real estate agent will need to provide an updated report to the seller, and amend the selling price in the Sales Agency Agreement.
Marketing the property – restrictions on price advertising
If the selling price is included in the property sale advertising, then the following apply:
- The price advertised must not be less than the estimated selling price, which means that the only way to reduce the price advertised is to reduce the estimated selling price first. There is no restriction on the price advertised being higher than the estimated selling price
. - The price cannot be advertised as “offers above” or “offers over” (or similar symbols or words in any language) a specified selling price or price range. So prices will no longer be able to be advertised as “$500K+” or “offers over $500K”.
And at auctions, the auctioneer cannot say “Can I have a bid at $X to start?” - $X being an amount less than the estimated selling price. They must refer to the specified selling price or a price range quoted. This does not apply to the reserve price, which is set by the seller, at their discretion.
- If the estimated selling price is increased or decreased, then the real estate agent must change or retract the price on the advertising as soon as practicable afterwards.
These requirements apply to all forms of advertising – newspapers and periodicals, internet websites and social media, print flyers and brochures, shop windows, signboards, broadcast by radio and TV, emails and SMS texts.
These requirements apply to verbal advice as well as to written advice about the likely selling price quoted by real estate agents and their employees.
Record to be kept of selling prices quoted
Real estate agents need to keep a proper written record of the statements they make of the likely selling price for the property. Specifically,
- The record must contain the address of the property concerned, the price or price range, the date and time of the representation, and other information to be specified in the regulations.
- The record must be kept at the real estate agent’s principal place of business for at least 3 years.
The requirement to keep a record will need to be taken very seriously because NSW Fair Trading will prosecute for failing to keep a proper record.
Penalties and transitional measures
The new laws are offences with strict liability, that is, there will be no need to prove an intention to underquote: the offence is committed by the making of the price statement. Under the old laws, several prosecutions failed because the regulator failed to prove an intention to underquote.
The breach of the new laws will attract a maximum penalty of 200 penalty units, which is currently $22,000 per breach. In addition, if a real estate agent represents to a buyer that the property is likely to be sold for less than the estimated selling price, the court may order that the fees or commission payable on the sale be paid to the Property Services Compensation Fund.
The transitional measures will make the new laws apply to existing sales agency agreements, as from the date that the new laws come into force early in the new year. This will mean that real estate agents will need to review the estimated selling price in all sales agency agreements which are then current.
Also to come are regulations and an updated Underquoting Property Prices Guideline, to provide more detail of the requirements under the new laws.
Comments
In every real estate boom a practice emerges which cries out for stronger consumer protection. In previous booms, cooling-off periods were introduced to combat gazumping and greater disclosure was required in Contracts for Sale.
In the current boom, price underquoting is the most prominent consumer issue.
In NSW, the new laws will make it easier to prosecute real estate agents for underquoting the price.
So, will the new laws work? The answer is yes - the new laws will change the way that real estate