Certainly in areas of the country where demand for property is high, you can’t really blame a vendor for biding their time on a sale, accepting one offer while quietly waiting for someone else to come along with something better and/or one who is prepared to pay in cash.
At present, the current private treaty system works in the seller’s favour because, without a prior agreement, there is no financial penalty for refusing to exchange contracts at the last minute.
Apart from the obvious disappointment and emotional stress that being gazumped brings, buyers may also be left thousands of pounds out of pocket once they have already paid fees for a solicitor, survey and arranged their mortgage after having their offer accepted.
While gazumping remains legal in the UK, including in Scotland where the rules are tighter, the government recently announced plans to crack down on the practice by ‘encouraging’ parties to enter into a voluntary reservation agreement.
Already common in the new-build home market, buyers pay an upfront fee to secure the property, which provides peace of mind that they won’t lose out on the sale as they collate the relevant legal documents and arrange a survey.
Having a voluntary reservation agreement drawn up and signed by a solicitor is a straightforward process, and there’s no reason why the practice couldn’t be extended to sales on all properties, and not just new-builds.
The major drawback is that those who sign an agreement are probably already prepared to see the sale through to completion anyway. What incentive is there for vendors to sign an agreement when they could make several thousands more by accepting a better offer?
LEARNING FROM AUCTIONS
If the government went a step further and made reservation agreements compulsory, private treaty sales would resemble the practices seen in auctions, where at SDL we see less than one per cent of transactions fall through. Compare this to traditional sales, where it’s widely reported that at least a third of these collapse, and it’s clear that the rules governing auctions offer some valuable lessons for the entire housing market.
At auction, less than 1% of transactions fall through. In traditional property sales that figure is about 33%.
Securing a property at auction means the buyer is afforded better protection from the moment the hammer falls.
Not only is the offer accepted straightaway, they can proceed with the sale immediately because the legal documents are already in place. As a result, they could be in their new home within just 28 days, instead of having to wait several months. Even at conditional auctions, where the vendor has 56 days to ensure all the paperwork is in place, the buyer is in no danger of being out-bid.
Unlike private treaty sales, there is also a financial penalty for anyone who pulls out of an auction sale because they will lose the non-refundable fee paid beforehand.
For the moment at least, the government has not signalled that it will impose stricter rules on gazumping and there certainly doesn’t seem to be any immediate plan to bring back the Home Information Packs, introduced by the last Labour government.
While not watertight, the Scottish system offers more transparency for both buyers and sellers and the fact that surveys are undertaken before an offer is made, reduces the chance of nasty surprises.
REFORM NEEDED NOW
As they stand, the new rules around gazumping will do little, if anything, to protect the public. The safeguards that auctions offer mean that growing numbers of people now see it as a viable route to buy or sell a home; the market is by no means confined to property investors and/or those paying in cash to secure a quick sale.
Whether tougher regulations to tackle gazumping will be introduced in the future remains to be seen, but reform is urgently needed. At the moment, buyers are pinning their money – and hopes – on a deal that provides little protection, potentially derailing not just their transaction but others in the chain too. For the moment at least, I urge estate agents to be open about the options buyers have, whether it be auctions or private treaty sale with a voluntary reservation agreement in place.