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BFCSA: Sellers 'secretly' dropping prices to lure bidders

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Sellers 'secretly' dropping prices to lure bidders

Australian Financial Review Mar 22, 2019 1.04pm

Duncan Hughes


Desperate real estate agents are bolstering nervous buyers by secretly offering lower prices in a bid to boost auction attendances, sales, and prices that have been falling for months.

Real estate agents are secretly dropping quoted property prices by between 10 per cent and 16 per cent to select buyers in the final days before an auction in a bid to generate greater interest, correspondence between real estate and buyers' agents reveals.

Prestige properties in Melbourne's inner south-east advertised online for between $2.5 million and $2.75 million are being offered in targeted correspondence to possible buyers for between $2.3 million and $2.5 million, a difference of about 16 per cent.

Agents claim the offers are being made to stimulate demand in sluggish markets where auction attendance and clearance rates continue to tumble as market sentiment weakens.

"If a sales campaign is not doing well, the agents might drop the indicative price to bait a potential buyer," says Cate Bakos, a a buyers' agent for Cate Bakos Property.

"Vendors feeling the heat might lower expectations and sell at a lower price. They contact the real estate agents who then call around potential buyers and their representatives to say it might worth coming along to the auction because they might see a lower reserve," she says.

It is also a way to attract more than one offer, encourage bidding and, hopefully, push up the price, according to agents receiving the correspondence.

The practice has emerged as auction numbers dwindle, with around 930 auctions last weekend compared to more than 2000 the same week a year ago.

Sellers' fear of not getting out before prices fall further – or FONGO – is contributing to their willingness to negotiate on price and terms, particularly those who bought recently and are facing the prospect of the property's market value falling below its purchase price.

Reserve Bank of Australia analysis reveals what can happen when "irrational exuberance" turns to "irrational pessimism" in a housing market, even with record unemployment and record-low interest rates.

The central bank has calculated that, if home owners adjust their 10-year expected real house price gain from 2.5 per cent per year to zero, then real house prices could fall by a third over five years.

Pre-auction 'deals'

Amid rising anxiety over property prices, agents are attempting to bolster the market with pre-auction deals. Some of the properties they are discounting include:

*A four-bedroom, three-bathroom two-storey Victorian mansion in landscaped gardens in Kew, about six kilometres east of Melbourne, being touted for between $10 million and $11 million is being offered to some buyers at a revised $9.8 million.

*The price of a single-storey house in Toorak has been discreetly reduced from an upper reserve of about $3.3 million to between $2.9 million and $3.1 million, despite the higher price still being advertised.

Sellers are also more likely to "meet the market", which might involve lowering their reserve price to secure a sale.

Real estate agent Rhonda Yim of Belle Property sold a three-bedroom property in Lewisham, in Sydney's inner-west, for $1,292,500, slightly less than the reserve of $1.3 million,

She says sellers who believe their property has been marketed properly and attracted several potential buyers are willing to be pragmatic.

No signs of panic yet

"There are others who have made some money from a property, particularly investors, who believe now is the right time to sell because of growing negative sentiment," Yim says. "But there are no signs of panic."

Emma Bloom, director of buyers' agent Morrell and Koren, says vendors are getting the message that buyers are looking for value and won't pay over-inflated prices.

"Some of these discounts are making the property prices fair and reasonable. It is where they should have been quoting in the first place," Bloom says.

Rich Harvey, chief executive of Sydney-based, says he is "not seeing much evidence" of FONGO. "I am not seeing any panicking or evidence of vendors having to get out of the market," he says.

Harvey says a powerful mix of falling prices and market uncertainty, particularly in the lead-up to the next federal election, is a great time to do a deal.

Buyers need to focus on the long-term fundamentals like location, amenity and value, adds Chris Foster-Ramsay, a mortgage broker for Foster Ramsay Finance.

There are plenty of properties selling well despite the doom and gloom, according to agents.

'Best and highest'

But Bloom warns transparent public auctions, where bidders can respond to counter-bids, are different from private negotiations, secret bids or round robins.

"Buyers need to know what to ask and what they are doing," says Bloom. For example, she recommends buyers insist on seeing written evidence of any competing bids.

She claims real estate agents will attempt to keep buyers in the dark about the price and the number of bidders and sellers' readiness to do a deal.

Too many buyers mistakenly think that when making a pre-auction offer, theirs will be the only offer presented to the vendor, says Bakos.

As public auction clearance rates continue to fall, boardroom auctions, round robins and 'best and brightest' are becoming more popular.

Boardroom auctions involve competing buyers meeting in a room, typically an agent's boardroom, and bidding against each other.

Meeting face-to-face limits the risk of bluffing over the number of other bidders or their intentions. "I like them because they are transparent. Vendors still get the benefit of stimulated action," says Bakos.

But it is important to check any terms and conditions. For example, cooling-off periods might not be available. Sellers might also not accept conditional offers that make the bid subject to finance or the buyer selling their existing property.

Round robins are usually by phone, or by an agent communicating between bidders. The assumption is the winning bidder will sign the sale contract. But the successful bidder is not legally bound until the deal is signed. Buyers are usually relying on the integrity of the agent in being the go-between. "This can create distrust," says Bakos.

She says it is important for bidders to remember the selling agents are acting on behalf of the vendor to get them the highest price. A 'best and brightest' sales approach involves a secret ballot where buyers are set the same deadline to submit their "best and highest" offer.

But there's an inherent lack of transparency in that method, and buyers – who do not like guessing prices in the first place – may end up offering too much.

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