In chatting with people about their experiences in purchasing a home, I regularly hear disgruntled and frustrated property hunters tell me that they have been “gazumped”. While an impressive word to say, it’s far from impressive if you’re at the receiving end! So… what is gazumping exactly and how can a person do everything in their power to make sure it doesn’t happen to them?
The Oxford Dictionary defines the word “gazump” (verb, informal) as “Make a higher offer for a house than someone whose offer has already been accepted by the seller and thus succeed in acquiring the property”. Thus, “gazumping” is doing this to someone else, and being “gazumped” is having this done to you.
Let’s get some facts straight: Just because you have fallen in love with your forever home, placed and offer, negotiated and had the offer accepted, doesn’t mean that the property is yours or will be yours. And EVEN if you have paid a holding deposit, or put down 0.25% of the agreed purchase price AND signed your contract AND given it to the agent doesn’t mean that legally the property cannot be sold to someone else!!! Hang on a minute you say. What do you mean? I know!!! Let me explain:
Firstly, a “holding deposit” means nothing other than that you are showing the agent that you are serious and it is a gesture of good faith. On the agent’s end, there is no legal obligation to only be dealing with you with respect to the property, and they can hold as many “holding deposits” for the one property as they like… Bottom line is: Don’t ever give a “holding deposit” to an agent!
A “holding deposit” is totally different from a “deposit of 0.25% of the agreed purchase price for the property”. The latter is put down if and when you are ready to sign a contract to then take 5 business days to undertake any further due diligence you need to (eg. building and pest inspection, valuation, independent strata report etc). A 0.25% deposit paid with signed contracts from both buyer and seller equals a “conditionally exchanged contract”. This means that the buyer can no longer be gazumped, even if a higher offer comes along. The buyer then has their 5 business days to get further professional information. If, at the end of this time, the buyer chooses to go ahead with the contract, they enter into the “unconditional” phase of the contract until the agreed settlement date. If, however, the buyer decides for any reason whatsoever, not to go ahead with the purchase, then as long as they pull out in writing no later than before 5pm on the fifth business day, all they will lose is the 0.25% deposit (which will then go to the seller). So… the pro of signing a contract and paying a deposit and the property “conditionally exchanging” is that no-one can purchase it instead. The con is that if you choose not to proceed beyond the fifth business day, you forfeit the deposit you have already paid. As an indication, on a $400,000 property this would be $1,000, and on a $1,000,000 it would be $2,500.
Buyers also have the choice of not signing a contract and putting down a 0.25% deposit until after they have done all the checks and balances they feel they need. While there is no risk of them losing any money here other than that which it costs to perform their building and pest inspections and other due diligence, there is certainly risk (especially in city and metropolitan areas across Australia) that someone else could sign a contract and take this property off the market in the meantime. In such a buoyant and fast moving market, I believe it is silly to currently gamble with one or two thousand dollars if you feel that you’ve found your dream home, and especially if you feel that your real estate agent has been up-front and transparent with you about the problems they are aware of that are likely to come up in a building report.
So… It’s pretty easy to see how someone who chooses NOT to sign a contract and put down a 0.25% deposit could be gazumped, right? Right! While they are getting building and pest reports or other things done, someone else comes along, has an offer accepted and signs a contract! But, how can a person who CAN a person who does sign a contract and put down the 0.25% deposit STILL get gazumped?… Well… I basically told you earlier! Did you catch it? The answer is: for a property to be “conditionally exchanged”, BOTH the purchaser AND the seller have to sign the contracts!
So, therefore, it is possible for an agent to take the deposit and the signed contract, but not contact or hear back from the seller for a while…. or for an owner to wait a few days or even weeks to see if “something better” comes along first before signing their contract! The most common reason, however, is that if the agent doesn’t exchange the contract themself but instead sends it off to the person’s lawyer to exchange, this can then sometimes take 3 or more days for them to sort out… and, in the meantime (you guessed it!), person xyz now comes along, loves the property, places a higher offer and then has a faster conveyancer or lawyer (or… as is sometimes the case… is one themselves)!
The best advice I can give you is:
– If you’re buying, ideally your agent will be able to exchange contracts if you ask.. and you ideally want this done asap on the same day! If not, then the contracts get sent to both conveyancers or solicitors. There is not a lot of control as to the speed that this will take for both contracts to be signed. However, at least if you can choose a genuinely excellent and efficient lawyer or conveyancer who is truly working in your best interests to do things quickly, that is the best you can then hope for!
– If you are selling, make sure you have a trusted and competent real estate agent who is used to exchanging contracts and who can do this expeditiously upon your acceptance of an offer. I exchange almost all of my sales contracts myself and this is always done on the same day. This then provides a win-win to both the seller and purchaser, as the seller can see contractural confirmation that heads towards an unconditional contract at the price they agreed to, and the purchaser can rest easy knowing that before they go to bed that night that they cannot and will not be gazumped.
The bottom line:
– Remember that a property is not yours until both you AND the property owner/s sign the contract and you have put down your 0.25% deposit;
– If you are sure that you want the property, and believe that the risk of losing the property is greater than anything that may be found through building and pest reports, bank valuations etc, then taking the property off the market with a 0.25% deposit and signed contract is a good way to go.
– Ideally, try to get contracts exchanged conditionally on the day by the agent. If not, then unfortunately it is a bit of a waiting game with the hope that no-one else comes in with a higher offer (or quicker conveyancer/solicitor) in the meantime!