What is ‘two-tier marketing’ and why are we hearing more about it?

Two-tier marketing is a phrase that has been around for many years, and in a nutshell it is a practice that can result in inflated prices, to the disadvantage of the buyer.

Essentially, it means that properties are marketed to different groups at different prices. Usually, this is due to the knowledge of those buying within an area, or the locals, as opposed to those from other areas who are less able to ascertain value. These out of town buyers are, as a result, more likely to pay over the market value.

In 2003, Neil Jenman reported that “the most commonly known two-tier marketing scams are in south-east Queensland. Indeed, 'two-tier marketing' has almost become a synonym for 'Queensland property scam'.”

Two-tier marketing quickly became the buzz conversation that year, with Four Corners discussing how it could be legislated against.

Stephen McDonell interviewed Chris Connolly from UNSW's Consumer Policy Centre to be told that the growth in the practice had been rapid.

"It's surprising that Queensland - which does have Fair Trading legislation - didn't exercise the powers in that legislation earlier and crack down on such an obvious scam. They seem quite willing to allow two-tier property marketing to take place - especially in south-east Queensland - because of the economic growth which resulted, basically from ripping off people from other states," he was recorded as saying.

At the time, Jenman noted that valuer Iain Herriot came up with the term in the 90s after he noticed that some sales were also starting to be valued at the higher price due to comparisons made with sales that had already been inflated.

Imagine going to see a development in an area you have never heard of. You’re buying a premium product, and you’re told that very little like it has been created before this time. You buy a two-bedroom apartment for $600,000. Later, you find out that a number of other local buyers bought the same property for $480,000. Perhaps you fail to do your due diligence, or you trust an adviser who does not work in your best interest. Either way, you’ve just been scammed into paying more than what it is worth.

It’s only when the property sells that this may become clear.

In fact, in June/July 1999 Iain Herriot took to the pages of Australian Property Investor (API) magazine to discuss the practice he first noted in 1991. He said that when valuations were not stacking up, developers, investment groups and similar took to blaming ‘conservative’ valuers.

Jenman went on to note in 2003 that it was a national epidemic.

“In ten years from now, we are going to look back on this period, see the tens, probably hundreds of thousands of victims who have lost billions of dollars between them and ask one question. How could this happen?”

The Real Estate Institute of Australia has also overtly told real estate agents not to be involved in such selling schemes.

For instance, they include the following points in their guidelines:

• Real estate agents must not engage in the practice of setting different tiers of pricing, with higher prices being charged to consumers who are, for example, resident outside the particular area of the property or who are otherwise unaware of material facts such that they are prepared to pay prices for the property that are higher than the prices that those who are aware of those facts would be prepared to pay.
  
  
• Real estate agents must not induce potential purchasers of property to believe that the stated price of a property is a fair market value when the price has been inflated by matters irrelevant to the value of the property such as marketing fees, commissions and profits.

Clearly, it is not only unethical but illegal to take part in selling in this manner.

Now, 11 years since Jenman posted his blog suggested we would be dealing with a nationwide epidemic, it appears he may be correct.

Terry Ryder has been overt in suggesting that some properties in Melbourne may be subject to two-tier marketing.

However, it is not just interstate buyers being fed inflated prices, but those offshore who are not clear on the costs. With 'out of town' replaced with 'overseas' buyers, who are arguably even less familiar with specific Australian real estate markets and their rights, the debate has started to surged again.

Recently, Property Observer reported that GiFang.com’s Michael Yang believes that China-based estate agencies are selling properties to China-based buyers at inflated prices. It was noted that 10% of those agents are expected to be taking part in two-tier marketing, as Chinese buyers are offered 'exclusive' lots at different prices to those sold locally.

This is currently up for debate. However, two-tier marketing appears ready to hit the limelight again as a topic of discussion.