Underquoting
*Please note this is a general guide only and should not be used in place of obtaining our advice. Any references are relevant as of the date of posting.
What is underquoting?
Underquoting refers to the practice of advertising a property for sale at an unreasonably low price to boost the number of interested buyers and ultimately increase the final price. This may occur where the advertised (or indicative) price:
is lower than the estimated selling price;
is lower than the vendor’s asking price (if one was provided); or
has already been rejected by the vendor.
Obligations of estate agents and agents’ representatives (collectively “Agents”)
Agents’ obligations with respect to underquoting in the sale of residential property are governed by the Estate Agents Act 1980 (Vic) (the “Act”), as well as the Australian Consumer Law (the “ACL”).
Requirements under the Act
Estimated selling price
Section 47A of the Act provides that Agents cannot be engaged to sell residential property on behalf of an individual without first providing an estimate of the selling price of the residential property (as a single amount or a price range). This estimate must be both reasonable and in compliance with section 47AC and any guidelines issued under section 47AD.
In calculating an estimated price of the property, section 47AC of the Act requires Agents to take into account the sale prices of the three residential properties that are “most comparable” to the property being sold.
Selecting comparable properties
The factors that Agents must consider when selecting the three most comparable sales to the property they are selling are contained in section 47AC(2) of the Act as well as the “Guidelines for selecting comparable property sales – residential property” published on the Consumer Affairs Victoria webpage pursuant to section 47AD of the Act. These include:
The standard and condition of the properties
Properties that are more closely related in standard and condition will be more reasonably comparable. This requires a consideration of the features of the comparable property at the time it was sold, including:
building materials used in construction of the comparable property;
the size of the comparable property (land size and floor size);
features of the comparable property (e.g. number of bedrooms, bathrooms and car spaces); and
special features of the comparable property (e.g. whether it has a swimming pool or tennis court).
The relative location of the properties
Comparable properties cannot be outside a 2-kilometre radius of the property being sold if the latter property is located within the Melbourne metropolitan area. Alternatively, the limit is a 5-kilometre radius if the property being sold is not located in the Melbourne metropolitan area.
Properties that are a lower distance apart will be more reasonably comparable, while Agents must also consider whether the properties are similar with respect to their:
zoning and street frontage; and
neighbourhood features (transport options, proximity to shops, schools and parks).
The dates on which the properties were sold
The closer the date of sale of a comparable property to the property being sold, the more reasonable the comparison will be.
Pursuant to section 47AC(1) of the Act, comparable properties must have either been sold within the preceding six months (if located in the Melbourne metropolitan area) or eighteen months (if not located in the Melbourne metropolitan area).
Build status
This refers to whether the properties being compared are already built, are under construction or are being sold off-the-plan. Properties will be more reasonably comparable if they are of the same build status.
Advertised prices
Per section 47C(2) of the Act, Agents cannot advertise properties for sale (including by making statements to prospective purchasers) at a price that is lower than the estimated price calculated by reference to the three most comparable properties to the property being sold.
Moreover, advertised prices cannot be lower than a price in a written offer that the Agent knows, or ought to know, that the vendor has already rejected (except where the rejection of the offer was not related to the price).
Indicative prices
The Agent must specify an indicative price for the property in a statement of information which is required to be included with any advertisement for the sale of the residential property per section 47AF of the Act.
Indicative prices must not be lower than the estimated price or a price that the vendor has already rejected.
Where the party selling the property specifies to the Agent a price that they will be willing to accept (an “asking price”), the indicative price must not be lower than the asking price.
What are the consequences of underquoting?
Under the Act, underquoting carries a maximum penalty of 200 penalty units, or $33,044.
However, the Victorian underquoting laws contained in the Act operate contemporaneously with the prohibitions on false and misleading representations (section 30 of the ACL) and misleading and deceptive conduct (section 18 of the ACL).
Agents found guilty of underquoting may potentially face a far larger penalty if this conduct also breaches the ACL.
Case study – breach of ACL for underquoting
In 2017, the Federal Court handed down a record penalty of $880,000 to Fletcher & Parker Balwyn Pty Ltd for underquoting 22 properties by up to $700,000 of the eventual sale price (see Director of Consumer Affairs Victoria v Fletcher & Parker (Balwyn) Pty Ltd [2017] FCA 1521).
The Federal Court treated each case of underquoting as a separate breach of the ACL, fining Fletchers $40,000 for each breach.
Underquoting was deemed a “marketing strategy” for Fletchers. That is, they intended to advertise properties at a lower price or price range than the reasonable estimated price or price range. The clear purpose was to increase buyer interest in the properties.
Evidence illustrated how Fletchers would explain their strategy to vendors, telling them “it is better to start low and lift the quote”, and that “record prices come from emotional buyers when they compete…this is your best strategy”.
Justice Murphy considered that conduct of this kind constituted a “cavalier disregard for legal obligations that [Fletchers] well understood”. Further, that it was “intended to and did create the illusion that the properties might be a bargain”.
In handing down the penalty, Justice Murphy also considered (among other factors):
the nature, extent and deliberateness of the contravening conduct;
the loss or damage suffered due to the conduct; and
any profit derived from the contravening conduct.
How we can help
Our team of lawyers and conveyancers have considerable experience in dealing with property transactions and understand the obligations that Agents and vendors must comply with when selling a property.
Should you require any assistance with an upcoming property transaction, please contact our office on (03) 9645 9500 or email hello@mertonlawyers.com.au.
