Introduction
Gazumping is a circumstance that buyers and sellers of a property will likely be involved in at some point if they continue to get experience and try to strike below-market value deals. When you are gazumped it can be annoying but is necessary a negotiator accepts it as part of the process and always a risk.
In this article, gazumping is discussed in detail which will enable you to stay on the right side of negotiations. Limiting your chances of getting gazumped and ultimately being better prepared as sales move quickly and you have to think on your feet.
What exactly is gazumping?
In property, gazumping happens when there is a seller who accepts an offer for a property but there is no legally binding agreement in place, so they go ahead and accept another offer on the property for a higher purchase price.
As a result, the initial buyer is left without the deal despite thinking they had it secured. This is where a buyer can say “they have been gazumped!”. Gazumping can in fact happen multiple times where a seller keeps agreeing to verbal offers but then accepts increasingly higher offers as they get offered to them.
Ultimately, it can be bothersome to those looking to strike a deal.
What is an example of gazumping happening in real life?
It can be hard to picture this happening in real life to understand exactly how this works. Imagine, as an example, a property is being sold on the open market for £100,000 and it hasn’t been sold for a long time, the seller may become complacent and start to consider lower offers for their property.
Over time, they may get an offer that they’re okay with accepting such as an offer for £85,000. The seller agrees this is the highest price they have ever been offered and they are keen to get their property sold and off the market.
However, nothing has been signed and someone else contacts the landlord or their estate agent and offers £90,000.
The seller of the property has a moral decision to make, they can either accept the £85,000 and lose £5,000 and maintain the verbal agreement they had or they could accept the higher offer for £90,000 and gazump the first buyer.
Most of the time, especially where there is an offer a seller cannot refuse, the property owner will accept the higher offer for £90,000, leave the first buyer disappointed and be £5,000 better off.
How can a buyer avoid being gazumped?
To avoid being gazumped as a buyer, there are a few things you can do. Whenever you approach a negotiation in general, whether it be inside or outside the industry of property, it is useful to have some of these points in mind.
Take out homebuyer protection insurance
Part of being gazumped is understanding that it can happen at any time and it is always a risk. This will allow you to accept this risk and take on homebuyer protection insurance if you choose to.
This insurance will prevent a buyer from losing money on fees associated with buying a property if they are gazumped. Including conveyancing fees or fees from the lender. As well as this, there are things that the buyer is protected from outside of being gazumped like if they pay for a property that later on turns out to be valued at a lesser price.
Build rapport with the sellers
At the end of the day, businesses are made up of people, and behind every purchase of a property, there is a landlord who has the ability to form a connection with a real person. Even estate agents are less likely to gazump a buyer if they like the buyer and have built some level of trust.
So, whenever making an offer for a property as a buyer, remember to do things like dress well, smile and remember the names of the people involved with the purchase of the property.
As well as this, listening well with a clear interest in the journey of the landlord and understanding where they are coming from is a great way to find some level of common ground with them where you can build trust.
Sometimes, especially when people have an emotional connection to a home or property they are selling, a seller would turn down an offer from a faceless buyer and much rather see it go to a buyer who can demonstrate they will take care of the property and have future plans for it that mirror the life the property already had.
Playing into the emotional side of the deal in this way is a great way to develop the rapport that will leave sellers torn with selling to anyone else if they receive a higher offer and may also inspire them to move the deal forward quicker, further reducing the chances of anyone else offering more money in the meantime.
Promptly move forward with an agreement
The shorter period of time from the initial offer to when contracts are exchanged for the property, the more likely it is that things will go smoothly. Do not be afraid as a buyer to ask for deadlines to accept offers and ask for completion dates in which you expect the seller to formally agree in writing to the purchase of a property.
Consider an exclusivity agreement
Exclusivity agreements are where both the buyer and seller agree to only negotiate with each other, agreeing that the seller cannot buy from anyone else or the buyer cannot sell to anyone else. There is a period of time stated in which this happens and sometimes a minimum price in which a buyer can start negotiating.
As an example, a buyer can be in an exclusivity agreement for one month where there is a minimum price of £100,000. Of course, the exact terms of the agreement will be more detailed than this and likely to be agreed upon in writing more formally.
This is the most effective way to prevent a gazump but may be hard to negotiate. However, a seller may also choose to let the exclusivity agreement run out of time and then the buyer will have to look elsewhere. So there is still no guarantee of a sale, just no guarantee of gazumping.
Buy property at auctions
Without strictly arranging an exclusivity agreement, a buyer can get around this by asking the seller to take the property off the market. Having almost the same effect without it being bounded by law.
This can work but there is still the possibility of a buyer contacting the landlord outside of the market perhaps through a personal connection and buying the deal.
Buy property at auctions
Traditional auctions or unconditional auctions are great for a quick guaranteed sale of a property. This is because contracts are exchanged immediately after the buyer agrees on a price within the auction house. This locks the buyer into the deal guaranteeing they will become the landlord within 28 days.
Nonetheless, there are also risks associated with buying a property at auction so do your research beforehand.
Buy property in cash, bridging finance or a wing loan
Alternatively, to buy a property at auction, you could use a bridging loan (also known as a wing loan) to finance the property in cash and buy it straight away. If you do it this way you would have to pay back the bridging loan over time.
Often, in order for a buyer to move quickly in a sale, they can buy the property using part of the bridging loan, and use the rest of the loan to add value to the property perhaps by renovating it and by adding another bedroom for example. After the fact, they can remortgage the property to pull out money, pay back the loan and increase the valuation of the house with some equity pulled out.
How is gazumping less likely to happen in Scotland?
Contrary to other countries in the UK, under Scottish law, there are agreements in place to help prevent gazumping. For example, they have something called “missives of sale” which are formal letters sent between parties to come to an agreement.
This is where the buyer and seller, or the solicitors acting on behalf of each party will provide formal letters in writing as opposed to this happening verbally.
There is still no guarantee of the sale until the negotiation using missives had been concluded, but because of the formality of the agreements, the sudden backing out of a sale is far less likely. On top of this, in order to start negotiating with another buyer, the seller has to finish their missive negotiation.
Is gazumping illegal?
Gazumping isn’t illegal although it definitely is seen as immoral or unethical. Unfortunately, even if gazumping on a property was illegal, there would be very little evidence to prove if it actually happened as gazumping often happens as a result of the breaking of a verbal agreement.
Can you lose money if you’re gazumped?
When a buyer agrees to a verbal agreement on a property it is possible to lose money because there are initial fees associated with the buying of a house. This includes mortgage fees and solicitor fees. As well as any time lost going to view a property and spend time negotiating for it.
But no, there is no other way to directly lose money when you are gazumped, unless you have done gazundering which is something quite different yet an easy mistake to make as the words sound very similar.
What is ‘gazundering’?
Gazundering is where a buyer is a person who conducts an immoral act, they’ll lower the value of their offer just as contracts are about to be exchanged. For example, if they paid a certain amount for a property and then after discussing the agreement they realise that the property is worth less, they lowered their price.
This would result in the seller having to either abandon the deal or accept this lower offer they weren’t expecting. This is different to gazumping as it is the buyer this time who has control.
Why is gazumping a problem?
You may be wondering what the big deal is with gazumping. Isn’t it just a standard part of the negotiation? Well, gazumping can have further impacts on buyers of property outside of a simple misunderstanding or a disagreement which leaves them disappointed.
Especially when it comes to property, for example, a buyer could have agreed verbally on a deal and taken out a mortgage on a property to buy it only to have to cancel their mortgage or change it which may cost a negotiation or cancellation fee.
On top of this, when gazumping happens in places where property sales happen even quicker like in an auction, a buyer can perhaps even take out bridging finance by accident if they believe they are going to buy a house. Contrary to mortgages, bridging loans cannot be cancelled and there is a steep interest rate if it cannot be paid back in time.
As a result, it is extremely important buyers have signed for the purchase of a property legally before you go ahead with any significant financial arrangements.
When is it likely I’ll get gazumped?
Gazumping can happen anywhere, not just on property. It can be as low level as a car boot sale or as high level as a multi-million pound property purchase.
Gazumping is something that comes part and parcel of negotiation in general so it is important you look out for them. Having said this, there are some indicators of when you may be likely to get gazumped seen below.
The seller wants to make more money
The seller indicating throughout the negotiation period they want more money is a key giveaway that they are apprehensive about closing the deal. If you are a buyer and you’re trying to offer a price the seller didn’t accept and then decided to accept later on.
There is a good chance they were weighing up other offers that were higher than yours in the first place and will be disappointed they have to accept it!
As a result, there is a strong likelihood the seller will accept your offer verbally and delay the exchanging of contracts in the hope they will get another offer like the previous one higher than yours again.
This isn’t necessarily a problem as long as you are aware of it as a buyer so you can take the necessary steps to protect yourself.
You have a low-ball offer accepted
Sometimes, you may low ball a property just to see if the seller will accept your offer. However, this isn’t always a good sign if the offer gets accepted as they may be keeping you as a placeholder waiting for new offers to come through.
Lowballing is a risky process but if it works out you may end up with a great property deal so this method comes with advantages too.
The sale keeps getting delayed
As discussed, a seller will delay and keep a buyer as a placeholder if they aren’t happy with an offer. This manifests as them attempting to not make the process move quickly.
Reasons like getting ‘paperwork’ together or ‘discussing’ the finances with professionals or with a spouse are common cop-outs to delay the sale of a property so it is important you are aware of the excuses when you see them.
What should you do after you get gazumped?
Sadly, there isn’t much you can do as a buyer if you’re gazumped. Just attempt to gather your finances to the best of your ability, don’t give up the search for a good deal and learn from the lessons and move on.
Nonetheless, if you think your terms of an agreement in a legally binding contract have been broken for example if a seller breaks the terms of an exclusivity agreement, you may be entitled to take the seller to court and have a lawyer fight for the right that the property gets sold to you.
How to Stop Gazumping as a seller
As you may imagine, gazumping isn’t at all planned out and a seller, despite doing it, may still feel bad or ruin their reputation by selling or by becoming a person who gazumped another buyer. In order to prevent this as a seller, make sure you have precautions in place. These can include:
- A clear guide price you will willingly accept
- Clear negotiation on what you expect
- A specific deadline for your property sale
- A good property valuation so you aren’t disappointed with offers
To conclude
Gazumping is a topic that may seem straightforward once you understand what it means but upon digging into the topic further it is evident that there is a lot more to the topic. Before engaging in a property negotiation, make sure you’re clued up on how to safeguard yourself against gazumping or if you are a seller, how to stop yourself from gazumping and potentially ruining a reputation.
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