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REISA Sets The Record Straight

16 Jul 13

An article was published by REBonline concerning the pending legislative changes to property sals in South Australia. REISA CEO, Greg Troughton responded to REBonline about this article. REBonline have today published a follow up article quoting excerpts from Greg's email. We would like REISA Members to read the original complete text of the email sent by Greg.

Stacey

I thought that I would email you given some of the perceived hysteria relating to the new laws impacting on residential auction in South Australia. Let me say from the outset that the Real Estate Institute of SA has now trained well over 1000 of our members and there has not been any more than a whimper of concern over how the legislation is to work (as opposed to some of the assumptions made by many on your earlier articles on this matter).

It is important to note that the entire rationale for the changes to the residential auction legislation is to stop underquoting – deliberately ‘quoting it low to watch it go’ as some say in the trade. In a practical sense, the scenario that is being sought to be eradicated is the constant price representation of say $400k incessantly over the period of the auction campaign, and then upon arrival of the auctioneer, the reserve price being set at say $500k. I use that as an example for convenience.

I have said it time and time again throughout the training of SA real estate agents – you have nothing to worry about if you do not engage in the insidious practice of underquoting. In short, it is business as usual for you and you should continue doing what you have been doing.

Under the new legislation, one of the many first things that needs to be determined between the vendor and the agent when selling residential land at auction is to decide whether a price representation will be made at all through the campaign. Put simply, will you give a price indication in the form of print, online or verbally? If you choose not to then there is really no issue – this, of course, is the purest form of auction. If however, you decide to make price representations at any time during the auction campaign, then you need to be aware that generally speaking the baseline price representation cannot under any circumstances go below the price sought by the vendor. In making that statement I have deliberately oversimplified the issue for the sake of simplicity. So that establishes the baseline price representation and generally speaking the vendor ' s price is a higher than that of the agent’s appraisal. And before I hear the howls and screams that sometimes the agent price is above that sought by the vendor, I make the following observation. While I am happy to have a doctoral thesis type discussion about the exception of the vendor wanting less than the appraised price of the agent, I think we should leave that to one side, as I think we can all agree it is very, very rare indeed. Now with the baseline price representation being established, any price representations can be made above that amount (albeit subject to some limitations like the ten per cent guide rule eg $500,000-$550,000). As many real estate practitioners would acknowledge (and have done so many, many times), why you would want to ever go higher if the vendor is seeking, say $500,000, would be perplexing (but again not out of reality but I will leave that to my doctoral thesis). This is not new – this has been law in South Australia since 2008.

Now along with the baseline representation, there is the new requirement to ensure that the reserve price set by the vendor can never be more than ten percent above the vendor's sought after price. As a result, if you do make a price representation pursuant to the requirements in the previous paragraph at any time during the auction campaign, then, yes, it would be reasonable to assume that the purchasing community would be able to put two and two together to make four and determine the likely reserve price. By way of example (again keeping it simple but reflective of the real world), if a vendor is seeking $500,000 for residential property at auction then the following applies:

  • In terms of the baseline price representation (should you do one) then you can never make a price representation below $500,000; again to stress the point you can say any of the following and it will be okay –

$500,000

$500, 000-$550,000

$580,000 - $620,000 (again not below $500,000 and certainly no greater gap than the ten percent amount from the lower end of the range)

  • In terms of the reserve price permitted, on the day (whether or not you have made a price representation or not) the reserve cannot be any more than ten percent above the price sought by the vendor. Again to stress the point –

If your vendor chooses to go without any price representation (as is the law in Queensland for example) then the vendor should be advised to include in the sales agency agreement a sought after price by the vendor that will give the vendor maximum flexibility to reduce the reserve price on the day – remember you can reduce it but you CANNOT under any circumstances increase the reserve price by more than the ten percent. Also, putting it simplistically - you can never underquote if you don’t quote a price to the purchasing public.

If your vendor chooses to go with a price representation or guide, then the baseline provisions apply (again in simple real life terms never going below the vendor's sought after price) AND the vendor will be limited to increasing their reserve by no more than ten percent on the day of auction from that price sought at the beginning of the residential auction campaign (remembering again a reserve can go down but not up by any more than the ten percent).

It is important to remember that the decision as to whether or not to quote a price for auction should always remain the domain of the vendor. I appreciate that there will be many agents out in the real world (as compared to myself in my ivory tower) that like to assist prospective purchasers by giving a price indication. I also appreciate that in very rare circumstances that the situation of a vendor or even the market place (I am going to great lengths here as you can see by being as flexible in my commentary as possible) can change. I can even acknowledge that in some circumstances you don’t know the likely price of some property as it is so unique. Given all of that, it becomes even more important for the vendor, upon guidance and expertise on the part of the agent, to determine what is the best approach for the property at hand. Finally, let’s say something did go awry from the beginning or during the auction campaign that limits the vendor's reserve price and in hindsight they wished they had a a crystal ball to go back in time – well, if that is in fact the case, regardless of circumstance, wont it be the market forces that will determine the price of the property in any case and the reserve price simply becomes a bystander in all of this? I will leave that one for you and your readers to ponder.

What about the option of simply cancelling the sales agency agreement or simply changing the vendor's price sought? The legislature has put in protections to ensure that this cannot be done and I believe any cute practice that might be adopted by agents should be thought through very carefully as this will become a flag to the regulators to review matters closely. After all, the Parliament has approved extra funding for regulator staff to police and prosecute under the new legislation.

I have said it before and I will keep saying it to my members until I am blue in the face – if you do not engage in the distasteful practice of underquoting then you have nothing to fear - keep doing what you have always done. For those that might consider the insidious practice (and I strongly believe that it may be a very very small minority) then you have everything to fear and from REISA’s perspective you should not only get caught but be prosecuted to the fullest extent of the new laws.

Finally, your articles by Steven Cross on both REBonline (23 May) and The Advisor (5 July) have led to some interesting commentary. Yes, in earlier days REISA expressed some concern about the legislation – after significant amounts of negotiation on this (including those relating to the most important matter affecting the profession being National Licensing) we believe we have the optimum outcome. The reaction of over one thousand of our members in recent weeks is a testament to this. Will it hurt auctions? I do not believe so, as it remains evermore the most transparent way of selling property. I anticipate that given the increased transparency, and the market place doing what it always has done and that is determine what the market is prepared to pay for a property, then this method of selling at auction will likely increase from its current level (of around 8%) in South Australia. Do you have to reveal your reserve price? Of course not.

Happy to discuss further if need be.

Greg

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