How Well is the Law Concerning Agent Price Estimates Working ? It isn’t!
This weekend (15-16 February 2020) I attended 2 local auctions conducted by different firms. There are a few things arising from this attendance that I would like to share with you, but in this blog I’ll only deal with 2 of them. I have written a blog entitled 2 Auctions – Update on Tactics to deal with the other things I wanted to mention.
Readers of my book, and my blogs, will be aware that Victorian law requires that agents provide prospective buyers with their estimate of the likely price of the house. This is a very important law that is intended to make life easier for both house sellers and buyers.
In both of the auctions I attended this weekend the final price was considerably higher than the top of the agent’s estimated price range – in fact, in one case it was mind-boggling higher.
In the 1st auction, the estimated range was $365,000 – $400,000. The property sold for $645,500 (that is 61% more than the top of the range!!)
In the 2nd auction, the estimated range was $600,000 – $630,000. The property sold for $715,500 (that is 14% more than the top of the range)
Now, all of this does not necessarily mean that the law has been broken, as it is quite possible that the results were well above what could have been reasonably expected. And in both cases I think that is so - the estimated ranges appeared to me to be reasonable, if somewhat conservative, in terms of the state of the market at the time. Also, in the case of the 1st auction, the property was unique, or close to it – it was a garage. According to the auctioneer a property like it had not been offered for a very long time (something like 40 or 50 years) in the suburb it was in.
No, my concern with these results revolves around other aspects of the law.
The law concerning price estimates requires that if the seller has set a reserve price, the estimated price range must incorporate that reserve price. In both of the auctions it was announced that there was a reserve price.
The opening bid at this auction was for $400,000, that is, the top of the price range. Bidding was sluggish until it got to about $430,000, and then there was a spurt, and things took off, and became almost chaotic in the high 400s. While bidding was in the mid-400s, the auctioneer quietly mentioned that the property was on the market (by “quietly”, I mean he didn’t say it was on the market, he just said words to the effect that the property would definitely sell (which means he was saying that it wouldn’t be being passed in, because it had passed the reserve price)).
Now, notice that the auctioneer did not indicate that the property was on the market after the 1st bid, even though he was having trouble getting bids after that bid. This very much suggests that the property wasn’t on the market at $400,000. In fact, in the light of all of this I would be pretty confident that the reserve price was probably about $430,000.
But that is a legal impossibility, as clearly $430,000 is not in the estimated price range.
What gives ?
It would seem that either the agent broke the law, or else used the loophole that I mention in my book (that involves advising the seller to only give the agent the reserve price immediately before the auction so that there is no time for the agent to adjust the estimated price range if it is above that range).
From a community point of view, neither of those options is acceptable. If a law has been created to achieve a particular purpose, any failure to achieve that purpose is not a good thing.
By the way, in discussing this with a person I know in the industry, another possibility emerged. It seems that there is a good chance that many agents are not aware of what the law requires in this regard. That is also not a good thing.
Also, the agents in this case also arguably broke another law. This other law requires that if there is a change of circumstance after an agent has made a price estimate that may significantly change the price estimate, the agent needs to revise the price estimate. In this case the agent became aware a couple of weeks before the auction that there was enormous interest in the auction. How do I know? Because the agent stated it publicly to the media both a couple of weeks before the auction, and then again at the auction. Surely the level of interest suggested that the initial price estimate was too low?
Just before the auctioneer finished his spiel in the 2nd auction, he said the seller had set a very reasonable reserve price, in fact a price that was lower than the auctioneer would have set.
The 1st bid in this auction was for $580,000. Bidding was initially slow-ish, but once it got to the top of the range it moved very quickly up past $670,000. While bidding was at about that level the auctioneer announced that bidding was well over the reserve already. All in all, I had the impression that the reserve was probably at about $640,000, but, to give the agent the benefit of the doubt, it is possible that it was at $630,000.
So really, there’s probably not much to see here. Except. Except, assuming that the reserve was at the top of the price range, how can the auctioneer publicly say that the estimated price range is lower than what he thinks the property is worth? The estimate is supposed to be an estimate of what the agent thinks the property is worth. Is it just me, or is there a disconnect there somewhere?
The more perceptive of you will have noticed that I referred to the auctioneer in both cases as a “he”.
Yes, I regret to say that my quest to attend an auction conducted by a female auctioneer remains unfulfilled.