It is unfortunately not uncommon for people to find the home they want, have an offer accepted, and then before contracts are actually exchanged, another buyer sneaks in ahead of them.
Exchange of contracts is when a formal contract comes into existence, and both the buyer and the seller are legally committed to the deal.
Gazumping, as this practice is known, is more prevalent in a buoyant market, but can happen in any market. Apart from the obvious disappointment, a buyer can also incur additional wasted expenses, such as loan and valuation fees, survey costs, building and pest report fees and legal costs. Are there any ways buyers can avoid this possibility?
Some years ago the New South Wales parliament introduced a provision which allowed for a five working day cooling-off period from exchange of contracts, the aim being that purchasers would have an opportunity to finalise finance and get building and pest reports, while knowing that they had a binding contract (unless they chose to rescind it during the five day period). If a buyer elects to rescind, they lose a quarter of one percent of the purchase price.
The law also provided that the cooling off period did not apply if a solicitor independent of the seller explained to the buyers that there would be no cooling off period, and gave a certificate to that effect. This is known as a 66W Certificate, after the section of the Act.
Most sellers want no cooling off, so that they can be certain that the sale will proceed, and that they can safely exchange contracts on any new property they are buying. The current situation is, therefore, that in most sales there will be no cooling off period, as sellers will usually require a 66W certificate.
How, then, can a buyer reduce the risk of being gazumped?
Step 1 is to get a loan pre-approval if you can. Your lender will indicate that it is prepared to lend you up to a certain amount, but of course this will still be subject to a valuation.
Step 2 is to make sure your solicitor is aware of you and your plans. Your solicitor will be able to help steer you through the process, which for most people is an infrequent occurrence.
Basically, the better prepared you are, the quicker the process should be completed, and the risk of being gazumped will thereby be reduced.
One common step is to ask the seller for a guarantee that they will not sell to anyone else without giving you a first opportunity, but this will not protect you against a price hike.
With commercial property it is not uncommon to take an option to purchase. An option gives the buyer the right to acquire a property at an agreed price within an agreed period, but the buyer can choose not to buy. A fee is payable, which may be nominal, $10 or so, or may be substantial, thousands or more. If the buyer does not proceed, the seller keeps the option fee.
There can be practical problems; the seller may not want to go through the complication of an option, and usually extra time and expense will be involved. However, particularly in a quiet market an option can allow time that buyers may need to sell their own home, whilst satisfying a seller that they are serious.
The lesson - your solicitor can help you through what can be a stressful and strange experience.