Making an offer: the sure fire way to avoid being gazumped

In a competitive property market, often buyers find themselves either trying to gazump or being gazumped. And with many people, the moral code is that gazumping is fine if you are the one doing the gazumping but unethical if you are the losing party!

In NSW, if you have had an offer accepted on a property but contracts have not yet exchanged, then other buyers are free to submit offers. And this is especially true when making an offer prior to auction. There is no law in place to make agents respond to a competitive offer in any set way, which means that you can’t be certain how the selling agent will react if it happens to you. Some will freely share information amongst buyers so you will all know the amount each buyer has offered, whereas others will be more discreet. Some will favour the original buyer while others only care about the highest sale price. Some will keep shopping around for increased offers until the buyers are all exhausted, others will give a deadline for best and final offers in a sealed envelope.

Generally speaking, one of three things are likely to happen if another buyer tries to gazump you:
1. The vendor decides to honour your original agreement (at the lower price)
2. The vendor gives you the first right of refusal at the higher price
3. They accept the higher offer. And if they accept the offer, the whole scenario could happen again if another buyer steps in with an even higher offer

So what are your options if somebody else is making offers on the property of your dreams?

Here are some to consider:

Option 1 – match the other offer and race to exchange contracts unconditionally.

Required steps:
1. Let the selling agent know that you are about to make an offer and want a copy of the contract
2. Have the contract reviewed by a solicitor/conveyancer
3. Order a strata search or building/pest inspection as appropriate (or take the risk of not getting one, though we would never recommend this)
4. Book the bank valuation if you need one (unfortunately this can put you at a disadvantage time-wise)
5. Organise to sign the contract and get the 66W certificate signed by your conveyancer or solicitor (this waives the 5 day  cooling off period)
6. Get the signed contract, 66W and deposit cheque to the vendor’s agent or solicitor and make sure they exchange contracts immediately
The risks are that another buyer might beat you in the race to exchange (especially if they have had a head start) or that you will still need to increase the offer in order to be the successful buyer.

Option 2 – offer the asking price (or even a bit more)
You will then still need to race to exchange as another buyer could still match or better the offer. Depending on whether the selling agent discloses offers or not, this could be a good strategy as the vendor may treat you more favourably – though there are no guarantees.

Option 3 – try to exchange with a cooling off period
Required steps:
1. Let the selling agent know that you are about to make an offer and want a copy of the contract
2. Organise to sign the contract
3. Take the contract and your deposit cheque to the vendor’s agent for exchange
You will then have 5 business days within which to:
4. Have the contract reviewed by a solicitor/conveyancer
5. Order a strata search or building/pest inspection
6. Book the bank valuation
7. Change your mind
However, with other serious buyers interested (or in an auction campaign) it would be unlikely that the agents/vendors would agree to a conditional exchange of contracts. And if you do change your mind, there is a penalty of 0.25% of the agreed purchase price.

The best way to avoid all of this is to make sure that you are ready to exchange contracts BEFORE you make an offer. Closing the gap between when you make your offer and when the contracts are exchanged will give less opportunity for other buyers to step in.

If you are the buyer who wants to gazump another, you have to make a serious offer designed to entice the vendors to renege on their previous agreement – don’t just add a couple of thousand dollars to the price. And if your offer is accepted, you had better exchange contracts quickly to avoid being gazumped…

 

Further reading

Bidding at auction

When is an auction property “On the Market?”

 

First published:- 4 April 2015

DISCLAIMER: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.

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