08 Dec Don't get caught with gazumping – Rob Balanda Part 2
In a 2 part series, we feature some sound legal advice from Rob Balanda about time is of the essence, gazumping and dutch auctions. In the first part he talks about the quaint and hazardous clause in some contracts that can catch you out as a buyer if you are not on the ball. In the second part he talks about why in some parts of Australia it is legal to gazump yet in others it isn’t. He also explains what it is to be gazumped.
Kevin: Earlier in the show, I was talking to Rob Balanda from MBA Lawyers about “time is of the essence” on contracts. In that chat, Rob talked about tow things. One was gazumping and the other one was Dutch auctions. I thought we might explore that a little bit more.
Welcome back to the show, Rob. Thanks again for your time. Let’s talk about gazumping. How does that happen?
Rob: That’s pretty ugly. It comes from the Yiddish word “geezump,” meaning to cheat or overcharge. It flows from the system of conveyancing that’s used in the big eastern seaboard states, Victoria and New South Wales.
In those states – unlike Queensland and Western Australia where you make an offer in the form of a live contract and once accepted by the seller, you have the property locked down, you have a live active deal, and the property is off the market – in Victoria and New South Wales, they start with a quaint thing called a sales note, which buyers usually do think is binding. They sign it, the seller signs it, but it’s nothing more than an expression of interest or some form of preliminary agreement.
It doesn’t become binding, lock the property down, and take it off the market from your perspective as a buyer until some three or four weeks later when the buyer’s and the seller’s solicitors agree on the wording of the actual contract, which is what we sign up here in Queensland and WA when we make the offer. They take three to four weeks to get to that stage, so sale note first, three to four weeks later, then they do an exchange of contracts, and then the property is off the market.
When a market is moving, Kevin, the unfortunate fact is that sellers will gazump buyers. That is, I’ve found in previous moving markets, you see sellers working on sometimes up to three or four buyers at the same time, playing one off against the other, and when they attract the highest offer out of those three or four, then that’s the one they accept and the other three are left high and dry. Each of them thought they had the property tied up, but they’ve been gazumped.
So all of the time and money they’ve spent with lawyers, doing due diligences and stuff, it’s all just thrown away, and it leaves you very upset and really out of pocket. It can’t happen in Queensland and WA because we have a different system of conveyancing.
Kevin: Is it actually outlawed in those two states?
Rob: No, it’s not outlawed. It’s just the conveyancing…
Kevin: It just doesn’t happen?
Rob: Yes, it’s just how it all flows.
What you need to do as an investor is move yourself into the Queensland/WA position as quick as you can because in a moving market, you will be gazumped. You’ll also be Dutch auctioned.
That’s a similar sort of thing where a seller uses your offer… Once they have that from you, Kevin, then they come to Balanda and get that to force him to push his offer up. When they have Balanda up, they take that offer back to you and get you up, so up and up it goes. Once again, very ugly.
It can’t happen in the big resource states. It can happen in the other states, so you have to move, in New South Wales and Victoria, to the Queensland position as soon as you can.
Kevin: How do you do that, Rob?
Rob: One of two ways. You can tell your solicitor/conveyancer that you want to sign up and exchange contracts now, because what they do is do all of the searches first and then three or four weeks later, sign the contracts. In the resource states, they sign the contracts and then do the searches on the basis that you’re protected because of the clauses in the contract.
All you need do in Victoria and New South Wales is just to tell your solicitor to sign up subject to a due diligence. That’s the basis you want to make an offer. Then you can do all of the searches with impunity, without any risk, or alternatively, that little sales note you sign, have your solicitor draw that up – it’s not hard – so that it is legally binding.
What you normally sign in an agent’s office is just something that’s a preliminary agreement that’s not legally binding. You can draw up a one-pager that is legally binding. One of those two things.
Also, tell your solicitor to move faster because if you just get caught once as an investor being gazumped or Dutch auctioned, I can assure you it’ll leave such a nasty taste in your mouth and you don’t want it to burn you for the market, do you?
Kevin: You have to be on side with the agent, too, and just express to them the desire that you don’t want to be caught up in that sort of awful backwards-and-forwards situation.
Rob: The argy-bargy. People unfairly blame the agent too for fueling the fire. But you know what? It’s not usually the agent; it’s usually the seller. Of course, the seller today is the buyer tomorrow.
So what’ I’m saying here is this is human nature. You just need to be aware of it and protect yourself about it. It doesn’t happen in a falling market. It doesn’t happen in a flat market. It happens a lot in a moving market, and that’s the market we’re moving into in pretty well all Australian states.
Kevin: Another thing that happens in a moving market, too, is multiple offers, when an agent will genuinely get more than one offer on a property before they can actually present it. There is a process in place, I know, in Queensland. Is that similar in other states as well for presentation of multiple offers?
Rob: Yes, there’s protocols as real estate practices where you have to be advised as the buyer that you are now in the position of competing multiple offers and therefore, put in your very best offer.
There is a way that you can get to the head of the queue nine times out of ten. If you find yourself an agent’s office on a Sunday morning and you pick up there are four or five other sales people who are going to put in an offer on this property you now want to buy, how do you get yourself to the head of the queue when there are competing offers? Add a little clause to your offer that says, “Unless your offer is accepted by 5:00 today, it’s automatically withdrawn.”
Putting that clause in will eight or nine times out of ten move the power from the seller who is just playing like they’re the prettiest girl in the class at school – sit on all of these offers over the weekend and make a decision Monday. If you put a deadline like on it and a little clause…
Agents will rarely recommend or promote such a clause to you because they operate on the principle that less is less. The less clauses you have, the more chance the seller will go “yes” to the offer. It’s for you to be educated about this stuff. It’s for you to drive this to yourself. It’s only a little two-line clause but it sure swings the power back to your side of the table.
Kevin: Wonderful talking to you too, Rob. Rob today in the show has taken us through quite a number of aspects: time is of the essence, gazumping, and the Dutch auction.
Rob Balanda from MBA Lawyers, thanks for your time.
Rob: Thank you, Kevin.