Gazumping and gazundering are frustrating practices that use loopholes in the home buying process in both England and Wales to exploit buyers and sellers. Whilst arguably these are unethical actions which stand out in an otherwise regulated market, they are surprisingly, completely legal. Read on to find out what these terms mean, how they impact property buyers and sellers, and how to avoid them.
What is gazumping?
Gazumping occurs when a seller accepts a higher offer from a second buyer, after having already accepted an offer on their home. This happens in the ‘subject to contract’ phase of a sale, before the exchange of contracts has happened.
While this is often an act of greed on the part of the seller, they are sometimes motivated by pressure from their mortgage lender. They may also use this tactic to break an upward chain where a higher sale price is required to secure their next property.
While frowned upon, this is entirely legal, and in fact, under the Estate Agents Act 1979, an agent is legally obligated to pass on every offer received to the seller until the moment contracts are exchanged. Failure to do so would be a professional breach. The final decision, however, lies solely with the vendor.
What is gazundering?
Gazundering is a tactic employed by the buyer, rather than the seller. It involves lowering the offer price directly before the scheduled exchange of contracts. This leaves the seller in a vulnerable position, particularly if they are part of a chain.
In many cases they are forced to accept a lower price in fear of losing their new home. As well as disappointment, this also results in significant financial loss, given the fees already paid as a part of the mortgage application process.
Gazundering vs. renegotiation
It’s important to understand that not every price renegotiation is a gazundering tactic. If a survey reveals essential repairs are required on the property in question, for example, there could be the need for a perfectly legitimate price renegotiation. This would accommodate the buyer’s additional financial outlay to pay for repairs that were not highlighted in the sale.
Why is this legal?
Both practices have been widely disparaged for years, however, they remain completely legal practices in England and Wales due to the ‘subject to contract’ principle. This means that until contracts are signed, making or accepting an offer on a property are purely classified as a statement of intent, not a binding agreement. Property sales are not legally binding until the subject to contract period is ended through the signing of contracts by both parties.
The problem lies in the fact that the ‘subject to contract’ period often lasts 8-12 weeks, and sometimes longer, which provides ample opportunity for gazumping or gazundering to occur.
The subject to contract period allows for the following to take place:
-
Local authority searches
-
Structural surveys
-
Securing a formal mortgage offer
-
Title deed investigations
However, given that these processes remain predominantly manual in England and Wales, they often take way longer than expected, leaving both buyers and sellers vulnerable to gazumping and gazundering, not to mention mortgage offer expiry.
How to avoid them
Unfortunately, while they fall into a moral grey area, due to their legal nature, it’s not possible to completely avoid gazumping or gazundering. However, there are certainly ways to reduce the risk that this type of tactic will happen during your property transaction.
-
Speed - Ensure you have a mortgage in principle and that a solicitor is instructed before an offer is made, to speed up the process
-
Exclusivity (Lock-out Agreements) - It’s possible to have a short-term contract drawn up where the seller agrees not to negotiate with other parties for a set period. This is known as a lock-out agreement and allows time for the searches and surveys to occur without the risk of gazumping
-
Home buyers protection insurance - This product is designed specifically to mitigate the risks of a failed property transaction, whether that’s due to gazumping or a buyer pulling out entirely
Need advice about protecting yourself from gazumping or gazundering or help with the homebuying process? Get in touch here and one of our advisers will be on hand.
FAQs
While these tactics are technically legal in Scotland, the Scottish property system is far less vulnerable to both. This is because a binding contract is formed much earlier in the property buying process. Formal letters known as ‘qualified missives’ are exchanged between solicitors as soon as an offer is accepted. This effectively eliminates the windows of opportunity for gazumping and gazundering to occur.