Gazumping – What is it, and why does it happen?

imageThis often-used jargon term has fallen out of favour with the downturn, but when prices pick up it will doubtless once again become part of the vocabulary of buying and selling property.

The word describes the situation when a seller, having already accepted an offer from a buyer, then changes to accept a different, higher offer from a different buyer. Making a higher offer on a property that already has a ‘sale agreed’ is called gazumping: the unfortunate buyer who misses out on the home they had agreed to buy has been ‘gazumped’. This is not just bitterly disappointing – it can be very expensive, because the first buyer may already have spent hundreds of pounds on legal fees, mortgage applications and surveys. Their money – and ‘their’ new home, with the dreams and aspirations that went with it – are irrecoverably lost. They are back to house-hunting, poorer but no wiser, as it could just as likely happen again.

This, of course, happens more often in an upward market, when buyers are competing for desirable properties – although it can take place at any time if a ‘new’ buyer finds their dream home only after the original sale has been agreed, but before it has been transacted, or if a potential buyer suddenly finds a buyer for their own home, and so is newly in a position to make an offer.

How can it happen?

Gazumping is possible because there is no legal status to an agreement to buy and sell a home in England and Wales. It is only when contracts have been exchanged that a property sale becomes binding in law. Until that moment, the buyer and seller have nothing but each other’s word to rely upon, and either is perfectly entitled, by law, to change their mind and pull out of the deal.

Can it be stopped?

No. As an act of good faith, the buyer (or the estate agent) will usually ask the seller to take their home ‘off the market’, and to display a ‘sold’ or ‘sale agreed’ sign. Estate agents will stop promoting the property, and will usually stop taking viewings on the home. It’s sometimes thought that estate agents encourage gazumping, but in practice it is the opposite… agents are usually happier for an agreed sale to go ahead without complications. Gazumping undermines this, and can cause mistrust all round. For the agent, who earns a small percentage of the final sale price, the difference between the offers makes only a very small change in the fee, so there is little reason why an agency would want to encourage it.

But, however much an estate agent might not wish to see a gazumping bid, the agent is legally obliged to pass on every offer made to the seller. It is an obligation of the Estate Agents Act 1979 that an Estate Agent has to pass on every offer made on a property – even if it is already ‘sale agreed’. The agent may refuse to undertake more viewings, and may make it clear that the home is sold, but until that contract is exchanged, the agent has no choice if another buyer insists on making an offer.

That’s when it becomes really complicated. The estate agent is working for the seller, and is both legally and morally bound to give the best advice and service in the seller’s interest. The buyer is not the estate agent’s client. A gazumping offer will be higher – often significantly higher – than the original offer. Also, the new prospective buyer may well be in a better financial position – less dependent on a mortgage, or perhaps even a cash buyer with no house of their own to sell. The agent has to give the best advice to the seller, and sometimes there is a clear case to go with the new offer. Indeed, even if the agent feels that it is better to stay with the first agreement, the seller may be swayed by the prospect of more money. More often than not, the gazumping offer will be accepted, even if the original buyer has already incurred costs and set their hopes on their new home.

Is it wrong?

Legally, definitely not. Morally… that’s a hard question. Certainly the original buyer gets a very rough deal. But it’s also very hard to expect the seller to turn away a bigger, better offer. Many sellers do feel a personal or moral obligation not to break their original agreement…  but, if the gazumping offer is tens of thousands of pounds higher, that is a very hard decision to make. It’s not necessarily fair to expect anyone to sacrifice such a large amount of money just to keep to an informal agreement with no legal status. Remember, too, that both the new buyer and the seller get what they want, even at the expense of one disappointed party. But it’s clearly not a very nice situation for those negatively affected.

It’s interesting to note that in Scotland, where the buying process is different, the acceptance of an offer is the close of the legal process, so gazumping can’t happen. Perhaps it would be better to extend that system south of the border. But, until the law is changed, gazumping will be an occasional part of the picture when houses are bought and sold. Just don’t blame the estate agent!

Making and receiving offers

 

maison-et-objet-paris-2015-market-for-the-home-2.0.jpgThere are two ways to look at a prospective house sale. The first is antagonistic. The buyer wants to pay the lowest possible price. The seller needs to get the most money they can from their sale. These two camps are in opposition, and if both bring this attitude to the negotiation, it can be very hard to satisfy both parties. The other perspective is collaborative. The buyer wants to buy, the seller wants to sell, and both sides are looking to achieve the same objective. Adopting this attitude will make things much easier to resolve. Both perspectives are, in some sense, true, but the first way can lead to intractable problems and stubborn negotiating that gets in the way of agreeing a sale. A constructive approach offers a ‘win-win’ solution, where everyone is happy with the deal.

The buyer’s perspective

Before making an offer, know exactly what you can afford. If you need a mortgage, speak to an Independent Financial Advisor (IFA) and get a Mortgage Approval in Principle (AIP). This will let you know how much you can borrow, and how much you can expect pay back each month. If you are a cash buyer, or are getting your money from other sources, you need to do the same calculations to truly know your financial position.

Remember – buying a house is only a means to an end. For most people, the aim is to build a new life in a new home. If you find the right house, focus more on the outcome and less on the negotiation itself. Of course you want the best deal, for less money. It’s natural to offer low, and to do your utmost not to pay more than you have to. But it’s hard to weigh the value of finding the right place. If you buy with a mortgage, you only need a little extra cash to make a much better offer. For example, if you are borrowing 80% of the purchase price, £5000 more will only cost £1000 in cash, plus a little extra each month. Some buyers get so caught up in ‘doing the deal’ that they lose sight of how little it will actually cost to improve an offer. Concentrate on what you are trying to achieve in the long run, rather than worrying about ‘winning’ the negotiation. If you find the home you want at an affordable price, you are already a winner.

For investment buyers, it’s almost the exact opposite. You should only be looking at the numbers. An investment property is a business, and you should try to dismiss the emotional appeal of a particular house. There, it comes down to the maths of whether you will attract tenants, and whether the rent will cover the cost. Even so, being direct and honest about your position, rather than trying to haggle, will give you a much better chance of achieving your goals. Investment buyers, though, should be willing to walk away if the numbers don’t work.

The Seller’s Perspective

Constantly ask yourself ‘what is it you are trying to achieve?’  If you are buying a new home with the proceeds from the sale, you should have a good idea of how much money you need to make. If you receive an offer which is too low, perhaps you can make a lower offer on the home you need. If there’s a chain, it’s easier to ask five people to take £2,000 less than for you to accept £10,000 below your price.  A good estate agent can help a lot in these cases. If you want a quick sale for personal or practical reasons, it can be better to accept a reliable buyer at a lower price, than to hold on in hope of something higher that may never come. Knowing your own priorities will help guide you towards the best decision.

Naturally you want the best price. The Estate Agent is working for you, not for the buyer, and although agents want a sale, their advice on the state of the market and the quality of the offer should be taken very seriously. If you are holding out for more, it’s useful to have something in reserve. Including furnishings in the price can give the buyer the justification for a higher offer. Buyers want a deal, too, so have something extra to give in order to get what you need.

It can be good to be flexible or creative. A buyer may be able to afford a larger mortgage but may not have ready cash available. If your home is just over a stamp duty threshold, perhaps you can offer to pay the duty, so that the buyer can offer more for your home but has less cash to pay up-front. Maybe you can offer to pay the removal costs out of the sale price. In both cases, the buyer can use the money saved to add to a deposit, allowing them to borrow more for a higher purchase price. If it costs you £5,000 in stamp duty to get £10,000 more for your home, you have clearly done well out of the deal!

Unproceedable offers

This is when a potential buyer makes an offer, but can’t go ahead with a sale until they have a buyer. Sometimes, the obstacle can be a link much further up the chain. They are hard to evaluate: on one hand, it’s great to have a potential buyer lined up, but on the other you might be waiting for months before everything comes together. If you receive an unproceedable offer, you may be willing to accept the price, but it is usually a good idea to leave your home on the market. The estate agent of the person who has made the offer has almost certainly told them it will be easy to find a buyer. It may be true, but be sceptical to guard your own best interests, and ask your own estate agent for their opinion. At very least, suspend marketing only to a deadline to give your prospective buyer some time to complete the chain.

If you want to buy a home but haven’t yet found a buyer, it’s still worth making an offer. First, you will have some idea of whether your chosen home is affordable. Second, you virtually guarantee that the estate agent will keep you informed of any other offers or developments. Most important, you have a real idea of how much you need to get for your own home. If your unproceedable offer is accepted, you may be able to take less for your own home to complete the chain. But be quick – even if you have your heart set on a home, you can’t expect the seller to wait forever.

A last word on negotiation

For both sides, remember that negotiation is only the means by which you both arrive at an agreement that suits everyone. The more honest and collaborative the process, the less likely it is to break down later on. You both win, or you both lose – very rarely is this not true. Be honest with yourself, and know your own mind and financial position. Be prepared to compromise or to walk away. It’s easy to get caught up in the detail, but is it really sensible for a deal worth hundreds of thousands of pounds to fall apart over a couple of hundred quid? From the minute an offer is made, both buyer and seller want the same result – ‘sale agreed’!

 

 

Viewing homes

 

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This is when it starts getting serious! The only way to truly appreciate a home is to see for yourself. Going round a few places will help you focus in on what really matters to you – but it will get confusing if you don’t get organised!

What to take on a viewing

A little preparation goes a long way. If you are seeing several homes, either one after another or over a course of a few weeks, then taking notes is the best way to differentiate one from another and to remind yourself which is which.

Take a digital camera. Take a picture of the front door and house number on your way in, so that you remember which home is which. Your photos will be separated by the front door.

Take a clip-board, with the agent’s details and a note pad. Jot down your observations as you go from room to room. Try to ignore the possessions in there – you aren’t buying the current owner’s lifestyle or furnishings. Decoration can be changed. Concentrate instead on the space, the natural light, the layout and the ambiance. Don’t forget to note which house the notes relate to.

Take your list of ‘must-have’ and ‘like-to-have’ things. Tick them off as you go. If you’re not sure, ask the agent. As you see more places, you may want to write a list of questions to take with you for each viewing. Again, identify the list to the home, so you don’t get them mixed up.

Most of all, take an open mind and some imagination. You may be impressed or appalled by what the current owner has done with the property, but none of that is your concern. Can you mentally empty the rooms and fill them with your things? If so, you can make a true judgement of whether the house will suit you.

Feedback and Second Viewings

All sellers, and their estate agents, like to have feedback from a viewing, even if it isn’t complementary! If you really didn’t like somewhere, the temptation is to ignore those messages from the agent asking your opinion. But don’t succumb. It’s not just that it’s polite and courteous to share your thoughts. It can also help you work out what’s good for you, and will give the agent a better understanding of your needs. Sometimes you might dislike something in a home which the agent can reassure you about, and you may reconsider a home you’d previously rejected after finding out a little extra information. More often the process of working out and explaining why one home didn’t do it for you, will help you understand more about what you really want. It will certainly help the agent to pick out homes that are more suitable. Giving feedback – even negative feedback – is always a good idea.

If you are taken with somewhere, though, add it to a shortlist for second viewings. Now is the time to do some proper research. Go and see the house – from the outside at least – at different times of day. Does the garden really catch the evening sun? Is there anywhere to park when everyone comes home from work? If you are going to live there, these things will matter, so it’s better to know before you buy!

For a second viewing, you should prepare a list of questions. You’ll want to know the council tax and utility bills. Test out the walking times to the shops and to town. Ask to see guarantees for works done. Look over the neighbourhood and think about whether you’d feel safe and secure. Don’t be afraid to ask about cracks in the plasterwork, stains on the ceiling. Ask about the neighbours – if the owner knows them by name and knows a bit about them, that speaks volumes. If not, the silence might tell you all you need.

At your first viewing you need to look past the décor to imagine if the house could become your home. On second look, though, you should be planning on the changes you would want to make, to decide whether it is worth the time and effort it will take. If there’s lots to do, that might well be reflected in the lower price you are willing to pay, even if the cosmetic details you want to change are not things that would lower the asking price.

In general terms, it’s worth visiting a place three times before you can be sure it will work for you, but if on second viewing your enthusiasm is confirmed or strengthened, then don’t hesitate. It’s better to make an offer, even a low one, early on, to make sure that your serious interest in the property goes on record. At least, then, you can be sure that the agent will tell you if someone else is interested or puts in a bid. You might even get the house for less than you expected.

Finding a new home

Whether you are a first time buyer, or if you are moving for the umpteenth time, finding a new house is a challenge and an adventure. Buying a property is a very large transaction, but it’s not just bricks and mortar… it is the place you will call home.

We can’t, of course, tell you what kind of home would be suitable for you, but we can give you some pointers and advice as to how to go about it. These suggestions may give you a little structure to help your decision-making, and that such a framework can be useful with such a daunting prospect as choosing a home.

Work out your finances

This should always be the starting point. You need to know how much money you have to put down on a new home. If you are buying outright in cash, this is your budget. If you need a mortgage, this is your deposit, and will make a big difference on how much you can borrow. Work out your monthly income and outgoings. Be honest and precise. Taking out a mortgage isn’t just about how much the bank will lend, but also about what you can afford to pay each month. Remember that interest rates can go up, so at very least consider fixing your mortgage for a period of time. In these uncertain economic conditions, be brutally honest as to the possibilities of your work circumstances changing for the worse. If you depend on overtime which might be cut, or if your industry is suffering redundancies, you really need to think long and hard about whether the time is right to make such a weighty financial commitment.

If you are sure, speak to an independent financial advisor to get the latest deals and mortgage products available. Ideally, get a mortgage agreed in principle before you start to look for houses. However you are intending to pay for your new home, it’s vital that you know exactly where you stand financially before you even begin to search. Your budget is the first thing to determine the criteria for your new home.

Make a list!

Writing things down is a great way of organising your thoughts – especially if you are house-hunting with a partner. If it’s on paper, you can organise your priorities, and between the two of you can recognise the things that matter most as a couple when your individual opinions are different. A good way to start your list is to make two columns – ‘Must have’  and ‘nice to have’. Then break your page into headings – the house, the location, the wider area. You may want to break these down into sub-headings – bedrooms, garden etc. Exactly what you put in your framework is up to you, but you’ll end up with a grid, waiting to be filled, that looks something like this:

 

MUST HAVE

NICE TO HAVE

HOUSE

Bedrooms
Two Three – spare room/study
Reception Rooms
Must fit sofa/suite in lounge Separate dining area would be good!
Bathrooms
Must have a shower Would like a downstairs loo
Garden
Courtyard at least, with room for shed Decking or lawn
Parking
1 off-road space Garage? 2 spaces?

LOCATION

Road
Not on a main road Cul-de-sac
Schools
Within 15 minutes drive of school Ideally within walking distance
Work
Within 30 minutes drive of work Ideally within 15 minutes drive

WIDER AREA

Motorway access
Less than 15 minutes to M5
City access
Bus route Walking distance
Suburb
East of the city St Leonards/Newtown

When your grid contains all the things that are important and relevant to you, then you can start to fill in the spaces. This will give you a real sense of what things matter, and how flexible you can be. Again, the details are all down to you, but your grid might look like this:

Now you have a clear plan of what you’re looking for. It’s worth noting that not everything in each column will have an equivalent – perhaps being near the motorway would be nice, but not vital. Maybe being within walking distance of school is essential, and nothing else will do. Either way, though, work down each column on its own and number your priorities. You will end up with two lists, in order, of things that your new home must have, followed by things it would be nice to have as a bonus. They won’t necessarily be in the same order, so your list might read;

These two lists together give you a comprehensive checklist to evaluate any potential new home you see. It may be that no single home ticks everything on each list. Perhaps you find somewhere which has a spare room in St Leonards, but which has no shower. Or maybe there’s no off-road parking, but you’re within walking distance of school and the city. By comparing like-for-like against your checklist, you can compare how homes stack up against your needs. You may also find that your lists change a little once you see what’s out there.

Finding homes to view

Now you know what you want, and how much you have to spend, you can start your search in earnest. The best and simplest way to search is on the internet. There are lots of different internet portal sites, where estate agents advertise the homes they have for sale. The biggest and best of these is http://www.rightmove.co.uk.  There, as with most portals, you can specify criteria such as price and the number of bedrooms, and get a selection of homes which meet your basic requirements. From there, reading the descriptions will let you check off things against your list. You should be able to narrow down the number of potential houses to a manageable shortlist of up to a dozen. From there, it’s relatively easy to book some viewings and start to see exactly what you can expect for your money.

If you are dead-set on a particular area, it’s worth driving or walking around looking for signboards. You can, for a snapshot, browse through the local paper, but compared to the internet this is haphazard and time-consuming. It’s always a good idea to register with as many local agents as there are, because they will take responsibility for informing you when new properties come on the market. Every agent, like each portal site, will ask you questions about your budget, how many bedrooms you need, and which areas you prefer. The narrower your criteria, the less homes you will see, but the more closely they’ll match your needs. If in doubt, start broad, and get more specific as you learn about the availability of local homes. It would be a shame to miss something great because you’ve been too precise, but once you’ve got a sense of what’s available, you can focus in on exactly what you’re after. When you start doing viewings, you can build up a rapport with the local agents and they will know to call you as soon as something suitable comes up for sale.