The ACT Government’s good intentions on gazumping should be tempered with a bit of market reality.
Gazumping is where a seller agrees verbally to sell a home for a certain price, but before contracts can be exchanged to create legal obligations, the seller sells to someone else for a higher price. As a result, the first buyer is out of pocket for searches and building inspections.
The practice is regarded as unethical, but it is not illegal. The new law will not make it a crime, but hopes to reduce the opportunity for gazumping by forcing sellers to have a contract ready at the time the property is advertised. It will have to include: a copy of a search; approval status of the original building and any improvements or new structures; a building inspection for defects; and a pest report.
With that material a contract should be able to be signed almost immediately.
Buyers will get a five-day cooling off period, but will have to pay 0.25 per cent of the purchase price if they opt out. Buyers can waive the cooling off period if they get legal advice.
Buyers can get costs if they rely on the information and it proves false.
At present real-estate agents are in a bind. They are under a contractual and ethical obligation to the sellers to get the best price. An agent must pass a higher offer on to the seller and it is open to the seller to accept it.
Under the new law, it is less likely the agent will be in this bind because contracts will exchange quickly.
The principle behind the new law – to get contracts exchanged quickly – is sound. But it imposes unnecessary delays and extra costs on sellers, some of which will be passed to buyers.
The requirement to have contract ready with title search and building-approval status done is sound. This does not cost much and will enable serious buyers who fear being gazumped to sign up immediately. Most do not care about unapproved structures as long as they know about it. Demolition orders in the ACT are rare indeed. These steps alone would mean there need be no gap between verbal offer and a legally binding contract.
But why should a seller have to provide a pest and building inspection or an energy efficiency rating before being allowed to advertise? They are costly. Costs will now run to more than a $1000 just for a seller to put a toe in the water.
A lot of buyers do not want pest or building inspections. They are happy to look for themselves or get a friend with some knowledge to do it. A lot of people buy properties with the intention of bull-dozing or doing extensive renovations anyway.
A smart serious seller might want to voluntarily provide a building and pest report, in the same way that a person selling a car might provide an NRMA report, but to make it compulsory will put an end to some people advertising to see what the market is like. That is not in the public interest because it will prevent some houses going to market and the more transactions you have the more likely it is that housing resources will be more efficiently allocated.
Besides, the history of detailed legislative interference is that the industry responds with ways of around it.
The cooling-off provisions are a good example. The new law will allow for a waiver of the cooling-off period on legal advice. Within a week every contract for sale will come with a waiver form attached. It will mean every buyer at great expense and inconvenience will have to find independent legal advice when signing the waiver. More work for the lawyers. This is exactly what happened in NSW.
A better system would be to have, say, a three-day cooling off with no waiver. If a cool-off clause is exercised within the three days, the seller has a chance to advertise the next weekend, hardly missing a beat.
The EER system is a joke. Sellers frequently get a quick and dirty one and don’t care less if the rating is zero, just to satisfy the legislation. People who want to sell a house on energy efficiency grounds can do it without being forced to get a report from an accredited rater. And buyers can do their own checks with a compass to see if the big windows face north and a step-ladder to check the insulation.
The EER rating does not compel an improvement in the efficiency of housing. It only alerts people to its inefficiency. There is enough information about these days not to burden real-estate sales with expensive reports that buyers can achieve themselves.
There is danger with the building and pest reports. Nearly all building and pest reports have a disclaimer that they are for the seller’s information and no liability will arise if others rely on them.
The new law proposes to make the inspectors liable if a buyer relies on a report that proves wrong. The Government already has a problem with doctors and indemnity insurance. Building and pest inspectors’ insurance costs will go through the roof.
The Government should just stick to having the contract, search and approval status of existing structures ready and get rid of the EER. It should allow real-estate agents to supervise the exchange. There is no need for lawyers. For lawyers to suggest that buyers need their help is hypocrisy. Lawyers have been responsible for all the drafting of the exclusion clauses to the standard form contract that over the years have stripped away buyers’ rights.