Gazumping: What is it and how to avoid it happening to you

author-avatar By on December 21, 2020
Gazumping: What is it and how to avoid it happening to you

Gazumping is a fun word and a not so fun thing you want to be the victim of.

Akin to a roommate eating that leftover pizza of yours you’d been craving while at work all day, gazumping can see the house you had your heart set on snatched away at the last minute.

Find out what gazumping is, as well as how to protect yourself from potential gazumpers.

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.


What is gazumping?

Gazumping occurs when a buyer and a seller agree on a price to buy a property but the property is then sold to someone else.

This occurs when the person who made the original offer only has a handshake or verbal agreement.

As no contract has been signed, another person can swoop in and outbid the original offer, as there is no legally binding agreement.

A legally binding agreement typically only occurs when signed contracts have been exchanged between each party.

While it's somewhat of a grey area, gazumping is completely legal across Australia, however dodgy it may sound.

Only Queensland has managed to effectively eliminate gazumping, as when a buyer makes a formal written offer to buy a home and the seller accepts, the agreement is binding in the Sunshine State.

This process removes the risk of someone swooping in during the period between verbally agreeing and exchanging contracts.

Gazumping typically benefits sellers, especially in a rising market, as they’re likely to get a higher offer if gazumping occurs.

From a buyer's perspective, you may be asked to match a higher offer and pay more or lose the sale completely.


How does gazumping happen?

A real estate agent is legally required to work in the best interests of the vendor (the seller).

When a verbal agreement has been struck, the property is still technically available and is likely still being advertised.

Gazumping can occur in two ways from this point. The first is the agent can use the offer that’s been made to leverage a better deal for the seller.

The agent can shop the offers, going back and forth between prospective buyers, inflating the price for the seller until only one remains.

The second way it may occur is less salacious, and simply involves a superior offer than the original one being made.

Given the agent has to work in the best interest of the vendor, they will have to present the offer to them, who will very likely accept a stronger offer.

The agent can then shop the offer from here, or ask the original buyer to match the offer.


What happens if I get gazumped?

There are a number of negative consequences that come with getting gazumped.

The most obvious one is you’ve lost out on a home you had your heart set on and what may have been your dream home. That will no doubt leave more than just a sour taste in your mouth.

Adding to this sour taste will be the money you’ve lost. The vendor and/or agent are only legally required to refund your expression of interest payment.

They have no obligation to refund any money you’ve spent on legal costs, conveyancing, inspection reports, or finance application costs.

These costs can very easily rack up into the thousands of dollars, money which has essentially been wasted.


How to avoid getting gazumped

Unfortunately, there is always an inherent risk of getting gazumped as a buyer if contracts haven’t been signed and exchanged. Here’s a number of ways you can minimise and potentially eliminate that risk:

Get pre-approval

Home loan pre-approval is when a lender agrees in principle to lend you a certain amount of money to buy a home. It’s not legally binding and you’re not guaranteed that money, but its a great place to start for budgeting. When it comes to gazumping, pre-approval can mean a much shorter wait to get the funds lent to you to buy the home. This can shorten the time it takes to exchange contracts, reducing the risk of being gazumped.

Have your deposit ready

In the same vein as getting pre-approval, having your deposit ready to go and minimising the delay of exchanging contracts can dramatically reduce your chance of getting gazumped.

As soon as you can get your hands on the sale contract, send it to your conveyancer or solicitor. They can examine it to ensure everything is above board and the cooling-off period is in place.

Get a building and pest inspection>

Use the cooling-off period to get a building and pest inspection to ensure there are no structural issues with the home. You want to ensure a quick sale to avoid being gazumped, but you don’t want to buy a home that’s going to fall down when you move in.

Exchange contracts ASAP <

Exchanging contracts is the ultimate goal of a buyer when trying to avoid being gazumped. This is the point of no return for the seller, while the buyer has the cooling-off period to pull out. The house is off the market at this time, so should you pull out, you’ll have to pay 0.25% of the purchase price to make up for the inconvenience.

Don’t lowball the seller

Negotiating in good faith is an important part of avoiding getting gazumped. Prior to entering an offer, a buyer should have done their research on the property, the surrounding area, and properties recently sold in that area. The seller and the agent will know a suitable valuation of the home, but will also want to get the best price possible. Lowballing may seem like a way to shave some money off the price, but it makes you more vulnerable to the agent shopping the offer. Entering a market-value bid reduces the risk of this and makes you seem like a more reasonable party to work with.

Ask to be notified of other offers in writing

When you enter an offer, you can ask the seller to notify you if other offers have been made i.e. gazumping. This can allow you to match or outbid the offer, should you wish too.

Have a budget

It’s vital you have a budget when making an offer. In the event someone gazumps you or the agent tries to shop the offer, getting into a bidding war can be a costly exercise. Having a limit on how high you can go may prevent you from getting carried away and making an offer you can’t afford.

Buy at auction

Buying at auction removes the danger of gazumping completely. When someone makes an offer at auction which is accepted, the buyer and seller are bound to that purchase at that price.

Engage a buyers agent

A buyer’s agent acts on behalf of the buyer to buy a property. They have a close relationship with a large range of agents and consequently, know which ones may shop your offer and which ones are more reliable. While they won’t completely remove the danger of gazumping, they may be able to point in the best direction to minimise the risk of it occurring.


Savings.com.au’s two cents

After reading this, you may be very anxious about being gazumped.

Gazumping isn’t super common and prospective buyers aren’t waiting in the shadows to swoop in and buy your dream house.

It is possible though, and following the ways to prevent it will reduce the chance of it happening and are also great practices to implement.


Photo by Adeolu Eletu on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Alex joined Savings.com.au in 2019. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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