GAZUMPING - BE AWARE
With most home sales, there are three groups of people - sellers, buyers and agents. The sellers want the highest price, the buyers want the lowest price and the agents want a commission. For the buyers and the sellers, this is a dangerous formula. Most times, the agents are in no danger because they get their commission no matter what happens.
Many buyers are hurt because of a practice known as gazumping. Here’s what happens: You find the home you love and you VERBALLY agree on a price. Later, the agent says someone else wants to buy the home. How could this happen? It’s quite simple - someone else offered more money. You have been gazumped.
Sometimes you are given the chance to “match” or “better” the increased offer. Other times, you get no chance because the home is sold and you have not been asked if you would be prepared to pay more. This can be heart-breaking.
If you are selling a home it is only natural to want to sell to the buyer who offers you the highest price. But what if you verbally agree to accept a price from one buyer and then another buyer offers you a higher price - what do you do? It is easy to say, morally, that you should honour your word. In practice, it is not that easy. You may not have realised, at the time you received the first offer, that someone else was prepared to pay more. If you give your word based on incorrect information, should you still be bound to honour your word and lose thousands of dollars? This is a difficult ethical dilemma.
When agents are paid by the sellers, the agents have a duty to get the best price. This does not mean that agents should mislead buyers, but it does mean that agents have a duty to protect the value of the sellers' homes. If an agent gets a second offer for a home after a first offer has been verbally accepted, the agent has a duty to inform the sellers. The agents do not own the homes they sell. They are just agents - the people in the middle of the transaction. If an agent does not pass on an offer to a seller, the agent could be in big trouble.
In all transactions, the interests and well-being of the consumers should take precedence. But in real estate, there are TWO groups of consumers - buyers and sellers. Problems occur because the interests of these two groups are in direct opposition to each other. The sellers want the highest price, the buyers want the lowest price. The agent is in the middle.
Gazumping can seem dreadful for buyers when they are forced to pay more or when they miss out on the home they love. But it can also seem dreadful for sellers when their homes are sold for less than market value. After all, gazumping is only caused because a home was being sold for less than the market value. [The “market-value” is the best price that ANY buyer is willing to pay.]
Whenever gazumping appears in the news, out come the old cliches about what must be done to stop it. A common solution, touted by agents, is that auctions solve the gazumping problem. But the nature of auctions make it virtually impossible for consumers to avoid being hurt. Someone always loses at an auction. Always.
Buyers can count on nothing being certain until the sellers sign a legally binding contract. Between the time the sellers verbally agree to sell and the time they sign the contract, lots of things can happen. The sellers may get a better offer, they may decide not to sell or they may decide to increase the price. There are six words that buyers should remember - DO NOT GET YOUR HOPES UP. Until the contract has been signed by the sellers, NOTHING is certain.
If you have your heart set on a home, be careful not to offer too low a price. Understand that the lower the price you offer, the higher the risk that another buyer will offer more and gazump you. Some buyers try to be too clever. They try to get the home they love for a bargain price. Once you find the home you love, you have to consider whether you want to take the risk of losing it by offering less than you are willing to pay. Sometimes it is best - for your heart’s sake - to make your highest offer and just be prepared to walk away if it is not accepted or if another buyer offers a higher price. It is tragic to lose the home you love because you bluffed too hard. Be warned - gazumping occurs because the price of a home is too low. If you place too much pressure on the sellers to lower the price, don’t be surprised if they decide to accept a better offer.
Meet the Sellers.
If possible, try to meet the sellers. It is hard for sellers to gazump you if they know you and like you and if they believe you have been fair with them. Many sellers are happy to sell to nice people even though the price is not quite as high. A retired doctor recently sold his home to a young couple despite having two other buyers who were prepared to pay more. The young couple wrote him a letter telling him how much they loved his home and how they wanted to raise their family in his home. When the other buyers - both of whom were high-earning professionals - discovered the reason the doctor had chosen to sell to the young couple, they both said the same thing, “It’s great to see that there are people like Dr Murphy still around.” Most people want to do the right thing.
All agents should warn buyers that nothing is certain until contracts are signed by the sellers. If agents were forced to honour their words, many of them would be more careful with the claims they make. The day is coming in real estate when agents are going to be held much more accountable for the verbal statements they make to consumers.
If you are trying to buy a home for a lower price than you are prepared to pay, insist that the agent informs you if another buyer offers more. This will give you the chance to increase your offer before the home is sold to the other buyer. Ask the agent to give you this assurance in writing. There is a letter on page 230 of the book ‘Real Estate Mistakes’ that you can use for this purpose. If you don’t have the book, just contact us and we’ll e-mail you a copy of the letter with our compliments.
To read extracts from Real Estate Mistakes please click here.