Valuation Hotline 0800 505 3355
Property search
Caution Step Down

Is there an end in sight to Gazumping and Gazundering?

How do you stop property sales falling through, and what is Gazumping and Gazundering?

No we’re not making up words at Preston Baker HQ, we are talking about two unsavoury practices that happen when buying and selling houses; gazumping and gazundering.

Neatly put:-

Gazumping: a buyer makes a higher offer for a property than someone whose offer has already been accepted by the seller, and thus succeed in acquiring the property.

Gazundering: to lower the amount of an offer that one has made to the seller of a property, typically just before the exchange of contracts.

Nearly a quarter of property sales fall through before completion, and it is likely a great number of these have something to do with gazumping or gazundering.

How to Stop Gazumping and Gazundering

The government are looking to trial a new scheme where buyers and sellers will have to sign a reservation agreement. Should one of the parties pull out of the sale without good reason, financial compensation will be due to the other party.

This agreement would bind parties much sooner in the house buying journey. At the moment the buyer or seller can pull out until contracts have been exchanged. The act of exchanging contracts can take some time, particularly if the buyer is getting searches carried out through conveyancing solicitors, or if the seller isn’t in a rush to move etc.

This reservation agreement would lock in the price of the property and the parties who are entitled to complete the purchase. It would make it harder to walk away from a sale and would make it more difficult to move the goalposts e.g. walking away from the sale; increasing the price of the property; offering a lower amount than what you originally agreed to, and so on. It would probably mean the seller has to also take the property off the market whilst the agreement is in place.

How would a Reservation Agreement work?

Simply put one or both parties would need to put down cash up front, to compensate the other party should you choose to pull out.

The reservation agreement is designed to reduce the number of sales that fall through, as well as give more confidence to buyers and sellers that the sale will complete.

It’s already a fairly commonplace occurrence in new build properties, buyers are asked to put down a reservation fee to secure their new property.

What might be acceptable reasons for pulling out of an agreement?

It is likely these will include bereavement, divorce, losing your job, or inability to secure the mortgage. You would also assume that if a survey came back with significant issues, that would also be grounds to withdraw.

At this stage the full details have not been ironed out, but the government have updated their online guidance to include the terms “reservation agreement” and they mention compensation.

How would these agreements work in practice?

Once a sale has been agreed the buyer and seller would be asked to make a deposit into a secure client account. This money would be held by a third party, perhaps the solicitor, or maybe an independent body / scheme. Both parties would sign an agreement setting out the terms and giving a set period of time to complete. If either side decides to withdraw from the agreement without good reason then they forfeit their deposit.

This could work in a number of ways. Perhaps both parties sign up and deposit funds. It could be that only the buyer has to pay up front. It could be that only the costs of the injured party are left to pay, rather than receiving the full deposit. We are sure a number of trials will take place to find the best course of action.

Finding the right level of deposit into the scheme will be difficult. It could be set by region, it could be set by a percentage of the property’s value, or it could be a flat fee. If the amount is too low, it won’t be a deterrent; particularly if the market is rising and sellers are seeing the value of their property increase. However, setting the level too high could price out first time buyers, or those without savings (though we’d anticipate that different rules may apply to first time buyers, as with the Help to Buy schemes that help first time buyers get onto the property ladder).

When will this come into place?

The government has commissioned a round of consumer research to determine public opinion, should this come back favourably a pilot scheme could be launched next year.

If you wanted that security now, there is nothing to stop you drafting your own legal lock in agreement to tie the buyer and seller into an agreement. However, this would incur your own legals costs to get into place, and it could put off some buyers.

As an Estate Agent, we think reservation agreements show promise to help smooth sales and ensure fall throughs reduce, but we are wary that it could price out some buyers if it isn’t drafted sympathetically.

We already have our own method for reducing fall throughs to 10%, without the need for a legal agreement.

It can be done, you just need the right proactive agent.