Gazumping is back in the ACT property market.
It is a pernicious and frustrating practice.
It happens like this. I tell a real estate agent I want to buy an advertised house for, say, $250,000. He contacts the sellers who verbally agree. I then go off and get building and surveying reports and line up my finance. This takes a lot of time and money. Meanwhile another buyer sees the advertisement and offers $260,000. The agent is required to tell the seller. He could be sued if he did not. The sellers then accepts this offer.
The agent might come back to me and we have a de-facto auction, or the new buyer might have cash and not care about survey and building reports. So I get gazumped.
Gazumping is legal in the ACT, though perhaps immoral from the point of view of the seller. Agents are in an impossible position.
The ACT has not legislated about the practice, unlike other jurisdictions. But perhaps it should not legislate. The legislative “”cure” can be worse thant he disease.
The word “”gazumping” is of uncertain origin, according to the Oxford (that is, the big Oxford with all the historic quotations which I have on CD). There is no better authority.
It has half a dozen quotes. The first appearance is in The Daily Express. “” “Gazoomphing the sarker’ is a method of parting a rich man from his money. An article is auctioned over and over again, and the money bid each time is added to it.”
That is not the present meaning. This and the next six quotes show early meanings to be a form of outright fraud and stealing and suggest a Yiddish origin. The last quote, from The Times, London, in 1971 settles on the present meaning: “”A Bill to be presented to the Commons next week_would outlaw the raising of the price of a house before contracts are exchanged. The practice is known as gazumping.”
What is to be done? The general manager of the Real Estate Institute, Adam Moore, says the return of gazumping indicates a rising property market. He would like to see the practice outlawed as it is in NSW.
The risk comes after you have made your offer and before formal contracts are signed. That could take a week or more. Some agents ask for what they call a holding deposit. But the holding deposit means nothing legally. It is merely an indication that you are fair dinkum. The seller can still take higher offers. But then again the buyer can pull out, too.
Our contract law will not enforce anything unless there is an offer and acceptance and what the lawyers call consideration. It has to be a two-way street. One party offers something and the other party has to accept the offer with something in return. I promise to buy your house for $250,000 and you agree to sell.
Gazumping is possible because there is no enforceable agreement to sell. And, indeed, there is no agreement to buy, until the contracts are signed and exchanged (the buyer signs his copy and the seller signs his copy and upon exchange the parties are bound).
Instant purchase would be one way around it. But there is trouble with that. What if a later survey reveals the fences on the wrong line, or if the building report finds termites, hidden cracks, dry rot, unapproved alterations or wiring and so on. The questions then becomes: Can the buyer back out? Or can the buyer get damages (a reduced price)? Or can the seller say buyer beware and force the contract at the original price?
The buyer needs time to give the property a thorough inspection before committing himself. In this time, a new buyer might gazump him.
In Queensland, they attempt the reduce the time by allowing the agent, rather than a lawyer to prepare the contracts for signing. This seems to me a dangerous practice. The agent wants a sale and is in no position to give independent advice to the buyer.
In NSW, the theory is good. Mark Fitzpatrick, senior associate at Minter Ellison and member of the ACT Law Society property law committee, explained that NSW requires sellers to disclose a whole range of things before contracts are signed: certificate of title, plans, easments, zoning, drainage plan etc. About 70 per cent of sellers disclose a survey. The law requires sellers relying on the survey as a disclosure of encroachments to give lots of detail.
Sellers also have to warrant that they have dislosured all nasties under a myriad of Acts like railways, main roads and so on that might affect the land and if they are not disclosed the buyer has option to back out or seek damages. The same disclosure is required at auctions.
NSW provides a cooling off period of five days to back out for any reason, but the buyer has to pay 0.25% of purchase price penalty ($500 on a $200,000 house).
That is a big improvement on the ACT where there is no requirement or practice of disclosure. Disclosure is done after the contract is signed. Closing the door after the stable has encroached on the neighbour’s land.
NSW has two drawbacks. One is that building defects and pests are still up to buyer to check and you need at least 48 hours to get these done. That gives a window for gazumping if another buyer arrives who does not care about them or has the skill to check himself onthe spot.
Further, NSW allows the waiving of the cooling off period if there is a certificate that the consequences have been explained to the buyer. And in a rising market sellers demand that. About 90 per cent of conveyances have no cooling-off period.
So the legislative scheme has come to very little.
A better way would be to make the holding deposit an enforceable option. The buyer puts down, say, $500 and says to the seller, “”I intend to buy this house for $250,000 and will sign the contract within, say, seven days. If I don’t you keep the $500.”
If the buyer finds silverfish galore and white ants in the floor he can give the sale the flick, but loses the $500.
If the seller gazumps, the buyer is entitled to sue the seller for the difference between his price and the higher gazump price.
You cannot legislate against immorality. It would be better if agents and lawyers change the practice of conveyancing to reduce the chances of gazumping.