by Neil Jenman
Reading time: 4 mins apx
Buying a home is stressful at the best of times. But when the market is hot – and there are several buyers interested in the same homes – the stress can become heartbreaking.
Especially if gazumping enters the mix.
But what is gazumping?
Here’s the meaning of the word ‘gazumped.’ After weeks – sometimes months – of searching, you’ve finally found your dream home.
Whatever the circumstances, you, and the sellers – via the agent – agree on the selling price.
Handshakes all around. You are so excited.
You tell your family. You tell your friends. You are so happy. There’s a spring in your step. You can’t get a smile off your face.
But then comes the call from the agent: “Sorry, I’ve got bad news. The vendors have accepted a higher offer. The home has been sold to another buyer.”
Your first words – after seconds of stunned silence – are likely to be: “What do you mean?”
The agent will repeat those eight devastating words: “The home has been sold to someone else.”
But how can this be?
It’s your home, surely?
It’s only been two days since the agent called and said, “Congratulations, the owners accepted your offer.”
You even got an email with the same word: “Congratulations.”
Of course, the agent will absolve themselves of any responsibility. It’s the owner’s fault. They were offered a higher amount, and they took it.
But you were told that the home was yours? What about the word, “congratulations” which was said to you multiple times?
Surely this is illegal. How can anyone agree and then pull out?
And, what’s worse in this instance (as can happen) – is that you haven’t even been offered the chance to match or better the offer made by the other buyer.
When you raise this point, the agent may remind you that you said that your offer was the most you were willing (and able) to pay.
And yes, that’s true. But surely you should have the chance to find more money. How can the agents – and the owners – pull the rug out from under you so blatantly?
It’s heartbreaking.
It’s cruel.
No one cares about your feelings.
Surely, you ask again, this must be illegal.
Well, no, it’s not.
In real estate nothing is certain until contracts are signed by the buyers and the sellers.
But what about their word?
Well yes, sure it can be argued that such conduct is unethical.
What happened to the handshake principle? Or the “your word is your bond” dictum?
But what would you do if you were selling a home and you agreed to sell at a certain price to some buyers – and then other buyers knocked on your door and offered you several thousand dollars more?
Does it depend on how much more? Maybe if it was just a few thousand dollars – say less than $10,000 – you might refuse.
But what if you were offered $100,000 more?
Is there an amount of money that can persuade you to break a solemn promise?
Unfortunately, today’s world is full of broken things – broken promises, broken hearts, and broken people.
And the simple fact is this: If home sellers agree to accept a certain price and then, before the contracts are signed, they are offered a higher price by a second buyer, many will sell their home to the second buyer.
So, what can you do to avoid being gazumped?
GET A SECOND CHANCE.
Of all the ways that buyers can be gazumped the worst, by far, is when the home gets sold to other buyers without the first buyers having a chance to increase their offer.
This situation is especially heartbreaking if the first buyers would have been willing to offer a higher price than the price the sellers accepted from the second buyers.
The main reason for such a frustrating case of gazumping is because the initial amount offered by the first buyers was below their maximum price.
As happens in many cases, the buyers were willing to pay more than their first offer – or the amount that was subsequently accepted.
In other words, when the buyers told the agent, “This is the highest we can offer,” they were bluffing.
So obviously, the way to avoid such a frustrating gazumping case is DON’T BLUFF.
Just offer your ‘walk-away-price’ at the start.
But this can mean that you may pay thousands of dollars more than you could have paid.
So, how much do you love the home? If you really love the home, then ask yourself if you are willing to take the risk of losing it by bluffing.
But there is another way. Instead of offering your highest price, tell the agent that your offer is all you can pay “at the moment.”
And then, if your offer is accepted, you need to make sure that if another offer is forthcoming from another buyer that you will be told about that offer (not necessarily the amount of the offer but just the fact that there is another buyer) and that you will be given a chance to maybe see if you can find some extra money.
Don’t be frightened to show that you love the home. You may consider saying something such as, “We are stretched to the maximum at the moment; however, if you are offered a better price will you please promise to notify us?”
Most agents will agree to such a promise. But remember, it’s still a verbal promise.
You need to get the agent to tell you in writing that you will be notified should another buyer offer a higher price. Agents often sell homes for less than buyers are willing to pay – either because they don’t have the skill to discover the buyers’ highest price or because they can’t be bothered contacting all buyers who’ve shown interest in the home.
All agents have a fiduciary duty to act in the best interests of the sellers. In most cases, agents can hide the fact that they have not acted in the sellers’ best interests. But not if you get their promise in writing – that should another buyer emerge, they will not sell the home without giving you an opportunity to increase your offer.
This situation often occurs with homes that are scheduled for auction. To their shock, many buyers discover that agents have sold a home before the auction without giving those buyers a chance to even make an offer.
So, many years ago – when I wrote my first book, Real Estate Mistakes, I included a number of letters in the Appendices. One letter is simply called ‘Letter to Agent – To reduce the risk of Gazumping.’ The letter is on page 230 of the book. If you don’t have a copy of the book or you don’t want to buy one and you’d just like the letter, please click here and download it with my compliments.
Always try to meet the owners of the home you are buying. Especially if you love the home and you plan to live there for many years with your family.
This may sound trite, but people who own nice homes – especially if they have lived in the home for many decades – like to sell their nice homes to nice people.
Further, it’s not easy for sellers to do the wrong thing (such as gazumping) to buyers whom they’ve met and whom they like. If you can shake the sellers’ hands and thank them for allowing you to buy their lovely home, you’ll reduce the likelihood of them gazumping you. Or you’ll certainly eliminate the chance of the home being sold without you being notified and given a chance to increase your offer.
SIGN-UP FAST – WITH CAUTION.
A sure way to eliminate gazumping is to sign the contracts immediately. But BE CAREFUL. Do not by-pass essential safety checks – such as building reports and independent legal advice. If you are pressured to sign-up fast – especially if you are encouraged to ignore safety checks – you could buy yourself a world of trouble.
So, tell the agent (and the owners) that you want to sign-up fast. But not without legal advice. You can fast track the signing of the contracts by making the sale subject to all the necessary safety checks.
Once again, you must get independent legal advice.
But here’s how experienced property buyers secure property instantly – with a small deposit and a small risk. They ask for what’s called an ‘Option to Purchase.’
With an option, you pay a nominal amount of money which is non-refundable, and the owners agree to give you the right to buy their home within an agreed period.
So, for example, you can ask for an option with a deposit of one thousand dollars (even one hundred dollars) and for a time of, say, 28 days.
This allows you to ‘tie-up’ the home while you do your research and legal checks.
Options are commonly sought by property developers – thereby giving them time to get council approval.
It has been this writer’s experience that it’s more beneficial to the buyer than the seller to use an option – depending on the amount of the deposit and the terms.
But never sign an option – either as a buyer or a seller – without getting the all-clear from your lawyer.
A lawyer should be able to give you a standard ‘Option to Purchase’ agreement (it’s usually only one page) which means you can secure a property instantly (as soon as you have inspected it and decided to buy it).
BUY AT AUCTION.
While public auction is the worst way to sell a home, auction can be a great way to buy a home below your maximum price – especially if you know what you are doing.
Be careful not to swallow the sophistry of the bait-pricing and waste thousands of dollars on inspection reports and legal costs for a home you had no chance of buying.
Look for homes where the sellers are providing a certified Building Inspection Report.
Of course, from the buyers’ perspective, an auction is almost immediately binding as the contracts are signed within minutes of the end of the auction.
In the book, 88 Reasons Why You Should Never Sell Your Home at Auction, there is a sub-section called ‘7 Reasons to Buy at Auction’. If you would like to read the seven reasons to buy at auction, you can download it by clicking here.
If you are concerned about any aspect of gazumping, you are welcome to call our Support Hotline on 1800 1800 18. We will do our best to support you – at no charge or obligation.
Hopefully, this article will be of help to you when buying what is likely to be the biggest financial purchase of your life.
And, as many agents don’t seem to understand – or empathise about – buying a home is one of the most stressful and emotional events in life.
As with everything you do in real estate, take your time to do your research.
Read books and gather information.
And always remember, before you make a final decision, the three vitally important words – THINK ABOUT IT.
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Steven says:
Compare with a buyers “cooling off period”
Nen says:
An option doesn’t seem realistic. What seller will agree to give you an option to buy their property (while turning down all other offers) and give you 28 days to make a decision, in exchange for a measly $1000.
Evan Mynard says:
Pete Spann always used to say that guzumping was made illegal in every state except for NSW. Also that not only did the contracts need to be signed, they also needed to be exchanged to seal the deal. Up until that point, guzumping was still a risk.
Not sure if the contracts still need to be physically exchanged or not. Most likely that technicality still exists also… Bloody NSW!
There should be a push from the consumer bodies to close the door in NSW and make it illegal once and for all nationwide.