In today’s show our good mate and solicitor Rob Balanda, from MBA Lawyers, has some great advice on how to avoid being gazumped and in true Rob style he gives us a negotiation tool – not just a way to avoid being gazumped.
Kevin: You may or may not have heard of the term gazumping. Probably, you might have if you’ve been in real estate or you’ve been around real estate people. Let’s find out what gazumping is because there may just be a way around this. While it doesn’t apply in all states of Australia, it certainly does in the two major states of Victoria and New South Wales, which is where a lot of our listeners reside.
Rob Balanda from MBA Lawyers joins me. Rob, firstly, let’s get an explanation about what gazumping really is.
Rob: A seasoned investor in New South Wales would probably think that was a strange question to ask because they know only too well. They’ll have probably been burned a number of times.
It’s Jewish. It’s a Yiddish term. It means, essentially, to over-charge or to cheat. Basically, what it means is when you think you have secured a property by signing a sales note in Victoria or in New South Wales, you think that property is now under your control – it’s off the market – but while your solicitor is negotiating with the seller’s solicitors to do the little ceremony called exchange of contracts, which takes place in three or four weeks after you exchange sales notes, the seller is like the prettiest girl in the class at school – if I can put it this way, Kevin – and is negotiating with two, three, or more other people to sell the same property to.
Kevin: Which school did you go to?
Rob: It wasn’t an all-boys one, mate.
Kevin: Obviously not.
So that’s gazumping. It’s still fairly commonplace, isn’t it?
Rob: I was talking to a chap at Byron last week. He was lamenting to me and complaining that he’d just put in two offers and been gazumped on two of them that week. His question to me was, Kevin, “How can I avoid this happening to me a third time this week?”
Kevin: I understand you do know that there is a way around this. What is it?
Rob: Yes. It’s not rocket science. What you need to do is remember the process in the two big eastern seaboard states is you start with a sales note, then your solicitor does all the searches of the property, all the due diligence, and then three or four weeks later, they sign off on the terms of the contract with the other solicitor, and you have an exchange of contracts.
In the big resource states, Western Australia and Queensland, that’s the same position we’re in when you make an offer. You make them in those two states via a live active contract, which once accepted, that is the same position you’re in three or four weeks later in New South Wales when you actually exchange contracts.
What you basically need to do is move to that Western Australian/Queensland position as soon as you possibly can. Don’t do all the searches and checks and due diligence before you exchange because in that three- or four-week period, that’s when you can be gazumped. You can have the seller double dealing you, triple dealing you, even.
“How do you protect yourself, then?” is the question. You’re going to instruct your solicitor to exchange contracts now. Don’t do the searches. Do them as we do them in Queensland and Western Australia – after the event. You exchange contracts subject to a little clause, just subject to a due diligence. Then that way, your conveyance and solicitor can do the searches after you’ve exchanged. That way, you’ve taken the property off the market, and you cannot be gazumped.
Kevin: Rob, it only just occurred to me that this could be one of the reasons why auctions are much more popular in New South Wales and Victoria. If you buy a property at auction there, it is unconditional. You’re not going through that sales note process.
Rob: Yes, and you can’t be gazumped. You can’t lose the property. You can’t be Dutch auctioned either. Yes, I agree with you, Kevin.
Kevin: Because in Queensland, when you buy a property, as you indicated, and you sign a contract, once that contract is signed by both parties, it’s a formed agreement. You can’t be gazumped.
Rob: No. The only person who can pull out after you’ve done that is you, the buyer. You control it.
But you get push back, though. Even when I talk to solicitors in these other states, they push back and say, “Oh, no. You can’t do that down here.” Well, in fact, you can. There’s no legal reason why you can’t instruct your solicitor to exchange contracts now subject to a due diligence; it’s just that they don’t usually do it with residential purchases.
Kevin: Why is that?
Rob: That’s because in between the sales note and the exchange of contract, they do all the searches. They apply for finance. They do the pest and building inspection. There’s no need, usually, by the time you get to exchange of contract stage in those two states that have any subject-to clause, they’ve all been satisfied. But there’s no reason why you can’t do it.
In fact, in New South Wales, you quite often see commercial contracts that are a little more complicated. They, quite often, are subject to a number of due diligence requirements, subject to a DA, subject to a feasibility, subject to securing other partners to bring them into the deal, this sort of stuff. It’s common enough with commercial and industrial sales in New South Wales. It’s just a mindset.
Kevin: Yes. In New South Wales and Victoria, if you do what you’re suggesting, which is put the due diligence clause in there and exchange the contracts, you’re effectively forcing the solicitors to do the type of transactions that are done in Queensland, which are almost on-the-spot contracts.
Rob: Yes, and there’s a couple of hundred years of history reasons for the resistance. You can see why they push back. They just don’t feel comfortable. It’s not the status quo.
But as an investor, you have to stop yourself being gazumped. If this happens to you once and even twice, it will burn you. It will leave you with a nasty taste in the mouth. It will cost you that opportunity. You will have missed out on the property. It might have cost you a thousand or a couple of thousand in legal fees and due diligence inquiries and stuff – all just thrown away.
The sales note to you as an investor doesn’t give you even a fig leaf of security against the risk of being gazumped. You have to get to exchange of contracts as soon as you can. If you do that, subject to a due diligence, you protect yourself. It’s just a matter of telling your conveyancer that’s the terms of your offer.
Kevin: But, Rob, what if you get push back through the agent from the seller saying, “Well, we don’t want that period of uncertainty?”
Rob: They’re still in a lot better position than they would be, Kevin, if they waited, signed the sales note, and waited for you, the buyer, to do all your searches for the next three or four weeks, and then exchange. Something could come up in the searches. The buyer can come back in that three or four weeks before exchange and even attempt to rewrite the whole deal.
I’d be pointing out to the seller, if you sign up now, subject to a due diligence, at least we’ve nailed the big ticket items – the price, the deposit, the settlement date. You’re in a lot better position as a seller signing up subject to a due diligence, rather than waiting for another three or four weeks for the buyer to carry out their searches.
Kevin: I would take it that that due diligence clause is going to be somewhere inside that excellent book of yours, which is called “Clauses Made Simple.”
Rob: Yes, Kevin. Thank you, and which you can acquire by going to my website, ClausesMadeSimple.com, and there are many more other helpful clauses.
Kevin: There are, indeed. I’ve been talking to the author of that book, none other than the one and only Rob Balanda from MBA Lawyers.
Rob, thanks for your time.
Rob: Thank you, Kevin.