Gazumping: What Does It Mean & Is It Legal?
In the property world, there are terms and practices that buyers and sellers need to navigate. Among these is a term that can make potential homeowners nervous; gazumping. This dreaded word can convert purchasing a house, which should be among the most exciting things in life, into something filled with disappointment and frustrations.
While gazumping may sound like jargon from a complicated board game, this particular act comes with real consequences that can get one very emotional or cost them unexpected bills. In the following paragraphs, we will endeavour to delve deeper into what gazumping is all about, as well as its implications on property acquisition. We will also elaborate on its impact on the property buying process, and tackling the legality of this practice that has become a notable factor in many property transactions.
What Is The Meaning of Gazumping
Gazumping happens when a seller receives a verbal offer on their property from one prospective buyer, but later accepts another higher offer from someone else. Normally, this occurs after the first buyer has begun the process of purchasing the house and has already incurred costs for surveys, legal fees, and mortgage arrangements. The word gazump originated from Yiddish “gezumph” which means to cheat or overcharge, exactly describing how such initial buyers feel – cheated out of an almost certain home purchase.
This is a common occurrence in sellers’ markets where demand far outstrips supply leading vendors to exploit competing bidders so as to maximise their profit. Until contracts are exchanged, which may take several weeks or even months, there is no legally binding agreement between both parties involved in sale negotiations. As a consequence, gazumping is a source of great uncertainty and stress for buyers, who often feel powerless in the wake of such an event. It turns the joy of securing a dream home into a precarious position where nothing is guaranteed until the dotted lines are signed.
Difference Between Gazumping & Gazundering
Gazumping takes place when a seller accepts a higher offer from another new buyer after already accepting a previous offer. Gazundering is the opposite of gazumping, where a buyer reduces their initial offer having an initial offer accepted, but before contracts have been exchanged. The buyer will usually cite property market changes, discovered property faults and changed personal financial circumstances as reasons. The threat of losing the sale or starting afresh with another purchaser might force the vendor to agree to this reduced bid. This can be frustrating for sellers who may be financially stretched if they have made arrangements to buy another home on the basis of that original offer. Both gazumping and gazundering show how uncertain the UK's property buying/selling process is prior to contract exchange.
Is Gazumping Common
While the frequency of gazumping can vary greatly depending on the market climate and region, it is more prevalent in competitive housing markets where buyers outnumber available properties. Periods of economic boom and geographical areas with surging property values often see higher instances of this practice. It is less common in slower markets where buyers may have more negotiation power, and sellers are more eager to close deals. Understanding local market conditions and engaging with a knowledgeable real estate agent can help in gauging the risk of gazumping in any given area.
Is Gazumping Legal in the UK
Even though gazumping may be morally ambiguous, it is a legal practice in the U.K. The main reason for its persistence is that, until written contracts are exchanged, such verbal agreements on property sales are not legally binding. This means that before the contract is signed by both parties, the seller has every right to take higher-priced bids. It does not bar the initial buyer from any possible financial or emotional consequences of being outbid though. This aspect of the law safeguards the seller's ability to obtain the highest possible price for their property but does little to shield the initial buyer from potential financial and emotional fallout.
However, it should be noted that despite being legal, gazumping is controversial. The practice has been called into question because of its tendency to disrupt the process of buying properties. Some suggestions seek to mirror what systems apply in Scotland or other jurisdictions around the world where offers become legally binding earlier in the process. In these circumstances, if they want to avoid being gazumped, those who intend to buy houses on the UK housing market must be watchful and proactive. Such approach includes discussing mortgages “in principle” for accelerated processing; demanding prompt signing of agreements and even sometimes concluding “lock-in-deals” involving deposits paid by both sides to demonstrate commitment.
Can A seller Accept a Gazumping Offer
A gazumping offer can be accepted by a seller in the UK legally since, as mentioned above, there must be an exchange of contracts before an agreement to sell a property becomes binding. This means that up until that point, the seller is entitled to entertain and accept higher offers, which could lead to gazumping the original buyer. There are several factors that may motivate a vendor to consider accepting a gazumping offer including but not limited to: significantly greater amount bid; prospective purchaser with better financial standing e.g., someone without chain; anticipated completion date shorter than a couple of months. While this could be seen financially viable by the seller, it invariably carries some ethical implications, and can irreparably harm the profile of a seller within the local market and among estate agents. Buyers who are concerned about the possibility of being gazumped can consider measures like 'lock-in agreements', although these are not foolproof and can involve additional costs.
Will I Lose Money If I Get Gazumped
If you find yourself the victim of gazumping, you may indeed incur financial losses. These costs arise primarily from fees spent on property surveys, solicitor services, mortgage application processes, and possibly other preliminary arrangements that become moot once the seller accepts a higher offer from another buyer. Additionally, there's the emotional cost of losing out on a property to which you've likely grown attached and envisioned as your future home. Buyers should factor the potential for gazumping into their overall budget for purchasing a home and remain apprised of their options should it occur.
Can I Get Insurance Against Gazumping
Insurance against gazumping, known as 'Home Buyer Protection Insurance', can provide some financial relief in the unfortunate event of being gazumped. This type of insurance typically covers expenses such as conveyancing fees, survey costs, and mortgage lending charges if another buyer’s higher offer is accepted. It's important for potential buyers to read the fine print and understand the scope of coverage, as policies can vary in terms of what costs are included and the maximum amount that can be claimed. While this insurance doesn't prevent gazumping from happening, it does mitigate the financial blow and offers a safety net during the vulnerable period before contract exchange. It's another tool in a buyer's arsenal to protect their interests during the complex and often unpredictable process of purchasing a property.
How Can I Avoid Being Gazumped
For many home buyers, gazumping is an unexpected and distressing occurrence. Despite one's best efforts, the risk of having your dream property snatched away after weeks or months of careful planning remains a stark reality. However, certain strategies can help mitigate the risk of gazumping and protect your prospective home purchase.
Act Quickly: Time is crucial when you want to secure a house. You should ensure that you have a mortgage in principle from your lender as well as making sure that you have sought legal representation early enough so that you make offers quickly before exchanging contracts.
Build a Rapport with the Seller: Creating a personal connection with the seller might make them less inclined to accept another offer. Sometimes sellers are looking for buyers who will appreciate and take care of the home as much as they did.
Consider a ‘Lock-in Agreement’: This may be one of the less common types of agreements but it is an agreement where both buyer and seller are required to make deposits that can be forfeited in case either party renounces their interest. It is a trust vote, which indicates both sides' commitment.
Demonstrate Financial Readiness: Let the seller know you mean business. Being free from any chain or having proof of funds/cash buyer status makes your offer more attractive than others who do not look prepared to proceed.
Invest in ‘Home Buyer Protection Insurance’: Even though this does not prevent gazumping, such insurance covers expenses paid if you are gazumped upon. Consider it as a financial protection mechanism that will keep your mind at rest throughout the process.
Ask for property to be taken ‘off the market’: If you make an offer and ask the seller to take the property off market, then it minimises chances of another buyer gazumping it. However, this is not guaranteed and may also fail with some sellers.
Implementing some or all of these strategies would help buyers minimise their risk of being gazumped and increase their chances of successfully securing their desired property.
