Auctions are a “lazy”, “manipulative”, “deceptive” and “heart-breaking” sales method that benefit agents and investors at the expense of regular families, experts have warned.
Real estate agents are the big winners, according to industry insiders, because of dirty tricks like ‘underquoting’ — a practice Victoria has thrust back into the national spotlight.
Victorian consumer affairs minister Marlene Kairouz introduced a bill to the state parliament on Thursday that would impose heftier fines on agents who mislead buyers about a property’s expected sales price.
“Victorian homebuyers deserve a fair go,” Ms Kairouz said in a statement. “This is about making sure they don’t waste time and money on properties they can’t afford.”
Real estate consumer advocate Neil Jenman, who has campaigned for decades to make the industry more ethical, told The New Daily that “everybody loses except the agents”.
The agent who promises “the biggest lie” (the most inflated sales price) to the vendor secures the listing. They then “condition” the vendor to expect a much lower price so they’re primed to be “massively undersold”, Mr Jenman said.
To ensure the auction is well attended, they underquote the expected sales price to the buyer, who is then pressured by the auctioneer’s “street theatre” to exceed their budget, he said.
“The winning buyer doesn’t lose. They gain a great deal. But on their way to buying that house, they could well have bid on a half-dozen other homes.”
For each failed bidding attempt, hopeful buyers shell out an “absolutely incredible” amount in the vicinity of $1000 for building inspection and legal fees, Mr Jenman estimated.
“An auction agent will say, ‘We had 10 spirited bidders.’ But what about the nine people who lost $1000 each? What about the nine people who got their hearts broken and their wallets walloped?”
Buyers agent Anjay Zazulak, who has purchased properties in Australia, New Zealand and Japan, agreed that agents are “taking advantage” of a system vendors either don’t understand or are powerless to stop.
Savvy bidders like Mr Zazulak, himself a property investor, frequently find bargains at auction because they are competing with ‘underquoted’ families who expect a far lower price. Thus, the investor isn’t pushed to their maximum.
“Buyers that do benefit are the ones who know what they’re doing.”
When a family does win, it’s often because they bid more than they can afford, Mr Zazulak said. “Anyone buying a family home, they get emotionally attached. And so all budgets and numbers go out the window.”
The reason agents push for auctions, according to Revolutionary Real Estate founder David Kaity, is because they are the easiest way to secure a sale, and thus a commission of about 3 per cent, while also allowing the agent to charge exorbitant fees for a four or six-week advertising campaign to promote the auction.
“Generally the campaign that precedes the auction is quite intensive, requiring quite a bit of spend and marketing, with obviously a generous markup for the agent,” Mr Kaity said.
Another danger for buyers is that their winning bid is locked-in, and not ‘subject to finance’. They must provide a deposit to the sellers, and risk losing it — and being sued for compensation — if they cannot secure a deal with their bank to finance the mortgage.
“The challenge with auctions is that there are no cooling off periods available,” Property Mavens buyers agent Miriam Sandkuhler said. “People are buying it unconditionally on the day, and again, that’s why agents use them. They like a fast, unconditional sale.”
Agents push vendors to accept lower prices because they don’t want to risk the sale, several experts said.
This is a point explained well by two US authors, economist Steven Levitt and journalist Stephen J Dubner, in the video below.
The counter-arguments, put by Finder.com.au money expert Bessie Hassan and several real estate agents, were that the set date of auctions give buyers the time to research a property; and that auctions provide flexibility, market competition and a protected reserve price for the vendor.
National Property Buyers spokesman Antony Bucello said auctions are ultimately good for vendors provided the agent “does their job” by attracting enough bidders.
Many of the experts were also of the opinion that ‘dummy bids’ have largely been eradicated in New South Wales, Victoria and Queensland because of new state rules, making auctions fairer.