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

Akin to a housemate eating the leftover pizza you've been thinking about all day, gazumping can see the home you had your heart set on snatched from you at the last minute.

You are more likely to be gazumped in some Australian states over others but there are ways you can protect yourself. Let's start at the beginning.

What is gazumping?

Gazumping occurs when a buyer and seller agree on a sale price for a property but it's then sold to someone else.

It generally happens when the buyer who makes 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 legal across most of Australia, however dodgy or unethical it may sound.

Gazumping by states/territories 

Queensland has managed to effectively eliminate gazumping, as when a buyer makes a formal written offer for a home and the seller accepts it, that agreement becomes binding.

This process removes the risk of someone else lobbing in during the period between price agreement and exchanging contracts.

Western Australia has the same legally binding status when written offers are exchanged but sellers can add an optional '48-hour' clause which allows a second buyer to come if the original buyer can't remove their conditions within a 48-hour period (such as finance approval). The property continues to be marketed during this time and if the seller gets a better offer, the buyer has 48 hours to waive their conditions or withdraw from the contract if they can't.

Gazumping is also more difficult in the ACT where sellers must attach key documents to sale contracts, making it more difficult for them to dump one offer for another.

The practice is easier in New South Wales and Victoria where verbal agreements on price are non-binding. This creates a window as formal contracts are being prepared for other buyers to make better offers.

Gazumping almost always benefits sellers, especially in a rising market, as the big reason they take up a newer offer is that it's very likely to be higher.

From a buyer's perspective, you may get asked to match a higher offer or you may not even get the chance.

How does gazumping happen?

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

Even when a verbal agreement has been struck on the selling price of a home, the property is still technically available and is likely still being advertised.

Gazumping can occur in two ways from this point:

• The agent receives a superior offer which he must present to the seller, as he's working in their best interests. The seller will most likely opt for the higher offer
• The agent can use the offer that’s been made to leverage a better deal for the seller. Some agents can 'shop' offers, going back and forth between prospective buyers, inflating the price until only one buyer stays in the race

In both cases, the agent can make the call to give the original buyer the opportunity to match or better their offer, or simply choose to proceed with the higher offer.

What happens if I get gazumped?

Unfortunately, there are a number of negative consequences that come with getting gazumped.

• Emotional distress: Gazumped buyers report feeling disappointed, frustrated, stressed, anxious, betrayed, and suffering a sense of injustice. It can be brutal
• Financial loss: Spurned buyers can lose the non-refundable costs they've already incurred in the buying process including: building and pest inspections, any legal or conveyancing fees, loan application and valuation fees, or any 'expressions of interest' holding costs. These can add up to thousands of dollars
• Opportunity cost: Particularly in a rising property market, buyers can feel they've wasted their time or lost ground with home prices continuing to rise while they were preparing to buy a home they failed to secure

How to avoid getting gazumped

Unless you're buying a property in Queensland, unfortunately, there is always an inherent risk of getting gazumped if contracts haven’t been signed and exchanged.

But there are a number of ways you can minimise and potentially eliminate that risk:

Get pre-approval

Home loan pre-approval means a lender has agreed 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 loan amount, but it can give you a head start.

When it comes to gazumping, pre-approval can mean a much shorter timeframe to get your home loan approved. Anything that reduces the time it takes to exchange contracts also cuts the risk of being gazumped.

See also: Lenders with fast approval times

Tee up your solicitor or conveyancer

Have their details ready to go so you can send them the contract to review straight away so you can be confident in signing it.

Have your deposit ready

In the same vein, having your deposit sitting ready in a lump sum can help minimise the delay in exchanging contracts.

Arrange building and pest inspections

Have inspectors or a company on 'stand-by' so you can get the inspections done quickly. You may be tempted to skip this step in a bid to exchange contracts more quickly but this can be risky.

Another option in some states or territories is to carry out building and pest inspections during the cooling-off period after contracts are exchanged. During these periods, buyers can pull out of a sale but sellers can't.

However, not all states have mandatory cooling-off periods (see more on this below) and you'll need to make sure you will receive the reports within the cooling-off timeframe. You - and your inspectors - will need to be organised.

Don’t lowball your offer

Negotiating in good faith is an important part of avoiding getting gazumped. Prior to making an offer, a buyer should have done their research on the property, its surrounds, and other properties recently sold in the 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 get yourself a good price, but it also makes you more vulnerable to the agent shopping the offer. Entering a fair 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 submit an offer, you can ask the agent to notify you if other offers are made. This can allow you to match or outbid them should you wish to.

Have a budget

It’s vital you have a budget when making or countering offers. In the event someone gazumps you or the agent tries to shop the offer, getting into a bidding war can be a costly exercise. Know your limit and be prepared to let the property go if the price climbs above your price range.

Exchange contracts ASAP

By having all your ducks in a row, it gives you the best change of exchanging contracts promptly. This is the ultimate goal of a buyer trying to avoid being gazumped.

It's the point of no return for the seller, while the buyer has the cooling-off period to pull out (but not in Tasmania and Western Australia).

The home is officially off the market at this time although should buyers pull out of the sale, they will forfeit some of the sale amount. The amount depends on the state or territory you're buying in. In Tasmania and Western Australia, buyers with cold feet need to pay the whole amount. 

Buy at auction

The only surefire way to avoid gazumping (outside of Queensland) is to buy at auction. When someone makes an offer at auction and it is accepted, both the buyer and seller are bound to that sale price.

See also: How do property auctions work?

Engage a buyers agent

A buyer’s agent acts on behalf of the buyer to purchase a property. They tend to have a close relationship with a large range of agents and consequently, may know which ones may shop your offer and which ones are less likely to do it. While a buyer's agent won’t completely remove the prospect of gazumping, they may be able to guide you through minimising the risk of it occurring.