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Published on September 12th, 2017

Buyers left confused as auction reserves are set higher than advertised price guides

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It is the question on everybody’s mind at an auction: what is the reserve price?

Or, in other words, is the property “on the market” yet?

And the answer may come as a surprise to some. The reserve can be whatever the vendor decides on the morning of the auction — regardless of the indicative price range that prospective buyers have been given. 

Buyers remain frustrated by reserve prices at auction, despite underquoting laws.Buyers remain frustrated by reserve prices at auction, despite underquoting laws. Photo: Joe Castro

Hopeful homeowners have raised questions about whether legislation introduced earlier this year has adequately tackled underquoting in Melbourne, dubbed the auction capital of the world.

That reserve prices are exceeding advertised price ranges also highlights why the property market is increasingly difficult for inexperienced buyers on a budget to navigate.  

I feel for first-home buyers who are trying to compete in this market…Ben Kingsley

Sean Arundell and his partner have, for months, spent their Saturdays at auctions across Melbourne’s western suburbs, carefully analysing the market ahead of this weekend, when they will bid on a house for the first time. 

In a competitive auction market, vendors can set reserves higher than the advertised price guide.In a competitive auction market, vendors can set reserves higher than the advertised price guide. Photo: Chris Hopkins

Mr Arundell, 31, said after watching so many properties sell above the indicative selling price, he was worried he wouldn’t be able to “stay in the race”. 

Under new laws introduced earlier this year, agents must offer an indicative selling price for each property, based on recent comparable sales. 

A vendor can set the reserve price on the day of the auction.A vendor can set the reserve price on the day of the auction. Photo: Dan Soderstorm

And the legislation has worked. Since it came into effect in May, the margin between advertised prices and final selling prices has significantly narrowed.

But some buyers remain confused and frustrated, reporting significant discrepancies between a property’s price guide and when it is announced “on the market” at auction.

For example, a house may be advertised with a price guide of $850,000 and $880,000. But on the day of the auction, the reserve price may be more than $900,000.

How does this happen? Because the reserve price is entirely decided by the seller, not the agent, a spokesman for Consumer Affairs Victoria said. 

“The reserve can be set as late as auction day and [it] may be influenced by the level of interest in their property,” he said.  

“Additionally, as the owner of the property, the vendor is within their rights to change the reserve price and refuse an offer at or above the reserve price at any time before contracts are signed.” 

Legally, it is the vendor’s prerogative to set the reserve price — they are not obliged to take the indicative price range into account. 

But Consumer Affairs Victoria said when a vendor had told their real estate agent what they expected to achieve at auction, the indicative price must reflect that figure. Also, the indicative price cannot be any lower than a written offer the vendor has rejected.

Ben Kingsley, buyers’ advocate and chief executive of Empower Wealth, said prospective buyers should research whether the comparable sales in the statement of information are realistic, and quiz agents about the vendor’s expectations.

“I feel for first-home buyers who are trying to compete in this market and they’ve got all these different variables around them — it’s challenging,” Mr Kingsley said. 

But he added: “If the industry was to have a set reserve, the whole concept of auctions has lost their benefit to vendors.”

The Real Estate Institute of Victoria’s chief executive Gil King said requiring a reserve price to be set at the beginning of a selling campaign would “imbalance the market”.

“It’s important to note that an equal amount of vendors have had to lower their price expectations, due to a lack of buyer interest or a low turnout of prospective purchasers at auction,” he said.

Mr King said it was not uncommon for homes to sell above the advertised price, but that alone did not mean a property had been underquoted. 

 “While the legislation is designed to be effective in a range of market conditions, it is currently being tested in one of the strongest property markets on record with demand continuing to outstrip supply,” he said.

Mr Arundell believes the current system is unreasonable, and should be more transparent. 

“It should be a requirement that a property has an advertised price; there is a minimum period before auction when that price can no longer be updated; and the reserve price is lower than the top of the provided range,” he said.

“It’s just disheartening to put in so much time and effort only to find out on the day that you can’t even bid when the vendor starts above your price range,” he said.

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