What is gazumping, and how can you avoid it?

Gazumping is a term that describes when a seller accepts a higher offer on their property after already verbally accepting another offer.  

Find out how gazumping occurs and how you can avoid getting gazumped. 

What is gazumping? 

In its most basic terms, gazumping means “to cheat” or “to swindle”. So how does gazumping happen in the property market scene?

In real estate, gazumping may look like the following scenario. You are looking to buy a property, and you think you have found the perfect one. So you put in an offer you think will be a fair value for the property. 

If both the buyer and seller (usually through their real estate agent) agree on the price and shake on it – here lies the problem, there are many things that can delay the exchange of contracts. For example, the buyer must make sure they secure finance for the purchase and must complete requirements such as building and pest inspections.

Typically, this no man’s land between the verbal agreement and the actual contract signing day is when gazumping happens. Just before you (the buyer) and seller finally sign off the paperwork on the deal, another prospective buyer comes in with a higher offer.

If the seller accepts the higher bid, your offer will be consequently ignored – you have been gazumped. In a more modern context, you can compare it to being “ghosted”, but in a property sale. 

Gazumping is not a new phenomenon. While it’s not common, it has been going around since people have been buying and selling houses. However, it’s been observed that this practice usually happens in a hot property market where prices are moving upwards due to strong demand. After all, the process doesn’t really make sense in a slumping or falling market. 

How does gazumping happen? 

Usually, a real estate agent is blamed for “gazumping”. But in reality, their hands are tied by their obligation to the vendor. This is because real estate agents across the country have an inviolable principle that they’re not allowed to work against the interest of their clients. In this case, it’s the vendor. 

It’s important first to understand that in most parts of Australia, a property sale only becomes legally binding when both buyer and seller have an exchange of contracts.

This means that even if a verbal agreement has been struck, the property is still technically available and is likely still being advertised. 

Remember that a real estate agent’s main role is to get the best price for the property. Additionally, they are legally obliged in most cases to present all offers to the seller up until the exchange of contracts.

This means that the agent can use the offer that’s been made to leverage a better deal for the seller. The agent can shop the offers, negotiate with prospective buyers, inflating the price for the seller until only one (the highest) remains. The remaining will be then presented to the seller, who will then, consequently, gazump the originally accepted offer. 

Of course, gazumping does not only work this way. Sometimes, another prospective buyer simply put in a substantially more attractive offer before the verbal agreement was finalised and the seller agreed to it. 

In other cases, when a buyer has not had their finances in order before signing the contract, the vendor may accept an offer from someone who might not have a significantly higher offer but already had their financial ducks in a row. 

Is gazumping legal? 

While the practice sounds unfair, gazumping is legal in most states and territories. More accurately put, gazumping is not subject to regulation in most parts of Australia. 

Queensland is the only state considered to have taken substantial steps to completely eliminate gazumping. In the Sunshine State, an agreement to purchase a home is legally binding once a formal, written offer is presented by the buyer and the seller has accepted it. 

This ensures the buyer that the property is theirs, pending their own actions in finalising the deal. This also prevents agents and vendors from continuing to look for other buyers. Additionally, it prevents a rival from sneaking in after a seller has agreed in writing to sell you the property.

However, take note that a final exchange of contracts is still needed for the property to actually change ownership. To know more about it, visit the Queensland government’s website here. 

In the ACT, gazumping is not considered illegal. On the upside, the government has taken steps to make it difficult to do so. A seller is required to have documents such as title certificates physically attached to most sale contracts, which makes it more difficult for them to ditch one offer for another.

In other states and territories, an agreement to buy a property is not legally binding until contracts have actually been exchanged and signed by both parties, which leaves a greater risk for gazumping.

How can we prevent gazumping?

Because gazumping has not been outlawed, there is always an inherent risk of getting gazumped as a buyer if sale contracts have not been signed and exchanged. Here are a number of ways you can minimise or eliminate that risk: 

1. Buy at auction 

The only guaranteed way to avoid getting gazumped is to buy a property at auction. Once bidding is done and the auctioneer declares, “Going, going, gone!”, the highest bidder has purchased the property. Because there is no cooling-off period, there is no chance for another buyer to intervene and offer a higher price. 

If you are going to an auction, here are tips on how to win. 

But remember that there are also some risks associated with buying at an auction. For one, the sale will generally be treated as “unconditional” as soon as the hammer falls, meaning you may be locked into buying it – with a hefty, non-refundable deposit payable – even if you aren’t ultimately able to get a home loan. 

2. Get pre-approved finance 

Pre-approved finance or conditional approval is when a lender agrees in principle to lend you a certain amount of money towards the purchase of a property.

While it is not legally binding and you are not guaranteed the money, it’s a good starting point for budgeting, as you will know the maximum amount you may be able to borrow. It can also shine a good light on you as a potential buyer because it makes your offer more tangible because it’s less likely to fall apart due to a lack of financing. 

Most importantly, getting pre-approved finance can help you avoid getting gazumped. If a lender already greenlit your loan, it means you will likely have a shorter wait to get your funds. In turn, this can shorten the time it takes to exchange contracts, lowering the risk of being gazumped. 

But how do you choose the right loan for your investment property? Here are our practical tips to help you decide. 

3. Get a building and pest inspection (and do it quickly!) 

Real estate is a big investment, so it’s best to make sure that you’re getting the bang for your buck. So before purchasing a property, it’s advisable to carry out a building and pest inspection during the cooling-off period. Getting an inspection could help make sure that the property you are buying is structurally sound and clear of pests, such as termites. 

The sooner you have your building and pest inspections completed, the more quickly you can exchange signed contracts and seal the deal. 

4. Have your deposit on hand 

Relative to getting pre-approval, have your deposit on hand. You can minimise the delay of exchanging contracts, consequently reducing your chance of getting gazumped. 

We’ve put together a guide on how you can save a down payment for your first investment property.

5. Secure legal advice

If you are concerned about getting gazumped after a seller has said “yes” to your offer, you can request that they take the property off the market. If possible, ask your solicitor to draft an exclusive agreement to present to the vendor. While this may come at an extra cost, it will be worth the peace of mind that the property won’t be snatched from under your nose. 

Your conveyancer or solicitor can also go over the sale of contract to ensure that everything is above board and that the cooling-off period is in order. 

6. Exchange contracts as soon as possible 

Exchanging contracts is the ultimate endgame of a buyer when avoiding being gazumped. Basically, exchanging signed contracts is the point of no return for the seller, while the buyer is given the cooling-off period to rescind the deal. 

During this period, the property is taken off the market, so in the event that you pull out, you will be charged 0.25 per cent of the purchase price as financial compensation for the inconvenience. 

7. Don’t lowball the vendor 

What is the top advice of real estate agents to avoid getting gazumped? Buyers should put their “best foot forward” in terms of price to secure the property. 

Negotiating in good faith is a vital part of preventing this practice. Before putting in an offer, a buyer should have done their research of the property, the suburb or city it is located in, and similar properties recently sold in that area. 

The seller and the agent will know a fitting valuation of the property but will also want to get the best price possible. While lowballing may seem like a smart way to shave some money off the price, it makes you more vulnerable to the agent shopping the offer. Entering a market-value offer lowers the risk of this and makes you seem like a more attractive party to work with.

Good property investors do their homework. To get an insight on vital market info, including growth rates, vacancy rates, median house prices, time on market and key demographic data, check out Smart Property Investment’s Suburb Search.

8. Request to be notified of other offers in writing

When you enter an offer, you can request the seller and the real estate agent to notify you if other offers have been made. This can give you the opportunity to match or outbid the higher offer (if you want to). 

9. Prepare your budget

Finance is king in property investing, so it’s vital that you have a budget when entering an offer. In the event that other bidders swoop in or the agent tries to shop the offer, getting into a bidding war can be a costly affair. Having a limit on how high you can offer can prevent you from getting carried away and making an offer that you can’t cash out. 

10. Work with a buyer’s agent

A buyer’s agent is a real estate professional whose role is to provide guidance to home buyers or property buyers throughout the process of purchasing a property. As a representative of a buyer in a real estate transaction, a buyer’s agent protects the interests of the buyer and makes sure that they’re getting the right property at the right price.

Additionally, a good buyer’s agent will have a wide network of agents and know which ones may shop your offer and which ones are more reliable. While working with one won’t completely remove the danger of gazumping, they may be able to point in the best direction to minimise the risk of it happening.

Here are our top tips on how to find the best buyer’s agent for your next property purchase. 

Smart Property Investment provides Australian property investors with must-have insight, strategies and real-life experiences to help guide successful buying and selling decisions in the Australian property market. Tune in to our podcasts covering a variety of topics related to the real estate market.

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