Even if you have done everything possible to make things go well, there are unfortunately still a few stages where things can wrong. One of the major hitches encountered by home-buyers is gazumping, an ugly practice which can be both emotionally and financially draining for the gazumped buyer. Note that gazumping is widespread in England and Wales, but not in Scotland.
What Is Gazumping?
'Gazumping' is the term used to refer to when a seller accepts an offer from one potential buyer, but then accepts a higher offer from someone else. The first buyer is left in the lurch, and either has to offer a higher price or accept that they have lost that home and continue looking. This practice tends to occur in a market when house prices are rising are there are more buyers around than sellers.
The problem is that until contracts have been exchanged the sale agreement is not legally binding. Once your offer has been accepted, either you or the seller can pull out at any time until the exchange of contracts. Unfortunately agents are legally obliged to inform sellers of all offers made on their property, even after one offer has been accepted. But during this period between the acceptance of your offer and exchange, you as the buyer spend a considerable amount of money on surveys, solicitor's fees, and confirmation of your mortgage offer. If the sale falls through you do not get this money back, and have to fork out all over again next time round - that is, unless you have been put off the idea of buying a new home. If you are part of a chain of sales, you could even be affected by someone else being gazumped.
The Scottish system of conveyancing has effectively eradicated most cases of gazumping. In Scotland a seller must provide written acceptance of a successful bid. This is legally binding and is further supported by Scottish solicitors' code of practice, which forbids working for a client who is seeking other offers after a written acceptance has been made.
How Can I Avoid Being Gazumped?
If it does happen there is nothing you can do, but there are some ways in which you can minimise the risk of it happening.
- Help speed up the sale - the faster it is, the less opportunity there is for the seller to pull out.
- Choose a seller whose agent has a policy on gazumping, if at all possible. Some agents insist that the seller signs an agreement to turn down any offers after one has been accepted.
- Keep in regular contact with the seller's agent - tell them when you have completed the survey and received a formal mortgage offer. This way they can be sure that the sale is progressing and are less likely to be tempted to consider any other offers.
- Make a pre-contract deposit agreement. This involves both parties paying a deposit of 1.5% of the agreed purchase price to a stakeholder, and signing an agreement saying that contracts will be exchanged within four weeks. If one side withdraws from the sale, the other party receives both deposits. If you are a gazumped buyer you therefore get some compensation. This is not a water-tight agreement as either party can pull out if they are willing to lose the deposit, but it definitely reduces the risk.
- Draw up an exclusivity agreement with the seller after your offer has been accepted. In return for a fee, this gives you exclusive rights to the house as long as contracts are exchanged within a certain period. Few people make such an agreement as it involves hiring a solicitor, but it is worth considering.
- Take out insurance cover to protect you if your deal falls through. This is yet another expense, but you might be glad of it if things do go wrong.
- Insist that the house be taken off the market once your offer has been accepted. Check that the board outside the house has a 'Sold' sign on it, and contact the agent if it does not.
Top Tip: If you are gazumped, emphasise to the agent and seller how keen you are on the property. If the buyer whose offer they have accepted pulls out, they may contact you to ask if you are still interested.
Other Potential Problems To Look Out For
There are a few other situations which you may find yourself involved in which it is worth thinking about as you may need to take extra care.
The Chain Situation
This is where there is a whole chain of buyers and sellers: for example, you are buying a house but you can't complete the purchase until your own house is sold; in turn, the buyer of your house can't buy until they have sold their own house; and so on and so forth. If you are part of a chain, your own purchase may be affected if someone a few links down the line pulls out of their sale or purchase, or if someone else is gazumped. If you are not part of a chain, this could encourage a seller to accept your offer over someone else's as there is less risk of the sale being delayed.
If there are two or more potential buyers for a house, the seller may send out contracts to more than one set of buyers. The buyers then have to race each other to send a deposit and the signed contract gets the home. Solicitors are legally obliged to inform any buyers involved that they are in a contract race. Contract races normally only happen when there is a shortage of houses or rising prices. Be careful - you may win, but if not you could lose a lot of money from all costs you have in the period before exchange of contracts, so only get involved if you have a very good chance of winning.