An end to underquoting in residential property sales for New South Wales’ agents
On 1 January 2016 amendments to the Property Stock and Business Agents
Act 2002 commenced. The changes prohibit real estate agents from engaging in a practice called underquoting. NSW Fair Trading explains underquoting
as follows:
‘Underquoting describes when an agent understates the estimated selling price of a property. This can cause interested buyers to waste time and money on inspecting properties, getting reports and attending auctions based on misleading estimates of the selling price.’
The new laws apply to agents who are selling residential properties (as defined in the Conveyancing Act 1919 s 66Q). The changes mostly concern the way in which agents are allowed to represent the estimated selling price.
In agency agreements, the agent’s estimate of the likely selling price of the
property must be included. This can be stated as a single figure or as a range. If the agency agreement contains a price range, the upper figure may only exceed the lower figure by 10 per cent (s 72A(1)-(2)). In Victoria, s 47A of the Estate Agents Act 1980 introduced the same 10 per cent rule in 2004. The NSW legislature has taken reform in this area further.
Agents now have a continuous obligation to ensure their estimated selling price remains reasonable (s 72A(3)). What this means is that as the market changes the agent must update the estimate.
Evidence now required in support of estimates
New Zealand (see Real Estate Agents Act (Professional Conduct and Client Care) Rules 2012, r 10) and South Australia (see Land and Business (Sale and Conveyancing) Act 1994, s 20(2)(a)) are jurisdictions where it is a requirement for agents to provide evidence to property sellers in support of their estimates.
This has become the case in NSW. Evidence, like comparable sales, must now be submitted to the prospective property seller not only at the start of
an agency agreement but also when the estimate ceases to be reasonable
(because the market changes). In the case of the latter, a revised estimate
becomes necessary, and further supporting evidence must be submitted
to the agent’s principal (s 72A(4)-(5)).
The requirement to provide evidence in support of an estimate comes after the Government made past sale prices freely available through a Land and Property Information service called NSW Globe in September 2015. In addition to the raw data being accessible through a web browser it integrates with Google Earth. The size and value of land parcels and past sale prices of every property in NSW can be visualised on a satellite map of the cadastre. Making this public information free should reduce the cost
of preparing comparable sales to support estimates.
When marketing a property for sale the estimated selling price in the agency agreement becomes the agent’s yard stick. Agents are prohibited from indicating or suggesting a price in advertisements (however published) that
is less than the estimated selling price in the agency agreement (s 73(1)).
Where a revised estimate has been given to the seller, the agent must update all ads and marketing material in order to remain compliant (s 73(3)).
Agents must no longer use phrasing like ‘offers over $500,000’ in their ads (s 73(2)). This section encompasses ‘similar symbols’ and ’words in any language’. The Second Reading speech specifically mentions plus symbols as
not being allowed. For example, a listing showing ‘$659,900+’ is banned.
Agent licensees and their employees must not represent to prospective buyers that the property could sell for less than the estimate contained in the agency agreement (s 73A(1)). The section covers any manner of representation, for example by email or verbally in person. This prohibition
carries the risk that an offending agent may have to pay their commission to the Compensation Fund (s 73A(2)).
Strict liability and the importance of keeping proper records
The new prohibitions are drafted as strict liability offences. The main source of evidence in any prosecutions is likely to come from the records which agents are now required to keep. Whenever an agent quotes a price (single figure or range) they must keep a written record of it for three years and include the address of the property, a time-stamp, and the figure(s) quoted.
The requirement covers estimates provided to prospective and actual buyers and sellers (s 73B). Proving an offence becomes a matter of comparing the estimate in the agency agreement and the price recorded in the agent’s file note or advertisement. Not making a record is an offence in itself.
Costs to purchasers
In his Second Reading speech the Hon. Victor Dominello as Minister for Innovation and Better Regulation said:
‘If a property price guide is artificially low, people spend money on building and pest inspection reports or strata reports, believing the property is in their price range. Estimates of the total costs involved range from $250 to more than $1,000 per property; and if this happens to the same people for a number of properties these costs can mount up.’
Another potential cost is for pre-auction legal advice. For those lawyers who provide advice gratis, and only charge if their client is the successful bidder, the prohibition on underquoting amendment could indirectly result in cost savings.
Further reform on the horizon
Further reform to make the real estate market more efficient is on the horizon. Earlier in his speech the Minister said the Government is also looking at ‘possible options to reduce duplication in the purchasing of building and pest inspection reports.’
One option is to follow the ACT (see Civil Law (Sale of Residential Property)
Act 2003, s 9) where the property seller is responsible for including a building and pest inspection report in a contract for the sale of an established house. Due to privity of contract, important considerations for legislators arise in determining how and when the eventual buyer can rely on the findings of the reports and the inspector’s professional indemnity insurance.
A review of vendor disclosure on this issue was commissioned by the previous NSW Government in 2010. The review recommended that building and pest inspection reports be annexed to contracts for sale by auction. This was contrary to the position of the Law Society of New South Wales’ Property Law Committee. The suggestion then was that the Property
Stock and Business Agents Act 2002 could be amended to require the real estate agent to make reports going to the quality of properties sold by auction available to bidders.
Another option doesn’t necessarily involve government regulation. Sharing economy solutions make one building and pest inspection report for a property, or even one solicitor’s advice on an auction contract, available for
multiple prospective buyers to purchase online. With the expectation of several sales of a singular report, the individual cost to each prospective buyer can be reduced.
In April 2016 Victor Dominello announced that under further reforms agents would be required to advise prospective buyers when these reports were available.
Harry Lehmann — this article has been slightly amended from the original which was first published in the Law Society Journal in February 2016
