From fake deals to hostile bidding wars, agents, buyers and sellers use dirty tricks to get ahead in the property market. Find out about common tactics and how to avoid them.
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The property market is more cutthroat during an upswing
Over a century of research holds that a property market follows predictable cycles. Most analysis concerns commercial property. But in countries such as the UK, where the housing market plays a big part in the economy, it applies to residential property too.
During a depressed market, there are fewer instances of the tactics described below. But when the market begins to expand, participants start becoming more ruthless.
What is gazumping?
‘Gazumping’ is when a buyer beats an offer the vendor has already accepted.
In England and Wales, transactions are binding only when the parties exchange written contracts. Until then, vendors can continue to accept other offers. Due to the different conveyancing process, gazumping is rarer in Scotland.
By the time they make an offer, a buyer may have spent several hundred pounds on conveyancing fees. If they don’t match or beat the higher offer, they are likely to lose this money as well as the property.
How can you avoid it?
Gazumping is more of a problem in a ‘seller’s market’, where demand is high and supply is low. Buyers who move quickly have the best chance of avoiding disappointment.
Get an agreement in principle.It helps to get a mortgage agreed in principle by a lender. An ‘agreement in principle’ is a no-obligation commitment to lend to the borrower, subject to a full application.
Line up a conveyancing solicitor. Have a conveyancer lined up before you make an offer. Get quotes from several conveyancing firms and instruct the firm you choose in advance.
Line up a surveyor. Finding a surveyor ahead of time and confirming their rates and availability allows you to move to the next stage as soon as you are ready.
Talk to the vendor. Once you have made your offer, ask the vendor to take the property off the market. They may be willing, especially if you show that you can move quickly. Ask for their agreement to do so in writing.
Avoid delays during the sale process. Your conveyancer will be responsible for making payments on your behalf when they become due. Be sure to have the money ready and be prompt in sending it to them. Also be sure to provide your mortgage advisor with everything they ask for in good time.
What is gazundering?
The inverse of gazumping, gazundering occurs in a ‘buyer’s market’, when buyers are few and supply is high. Investors who are trying to offload property in this kind of environment may encounter gazundering.
The term refers to a buyer lowering their offer just before the exchange of contracts. This leaves the seller with the unpleasant choice of accepting less money, or starting the whole process again.
Gazundering is only a problem when prices are falling. So if the property market enters another slump, gazundering buyers may once again make an appearance. And ‘no sale, no fee’ conveyancing deals allow buyers to push forward with transactions without committing huge sums in solicitor’s fees.
How can you avoid it?
Be realistic and transparent. Set a price that is in line with the prevailing market conditions and be honest about any defects or drawbacks of the property. Last-minute offer adjustments are more likely, and less unethical, when surveys reveal previously undisclosed problems.
The goal is to deprive the buyer of negotiating power where possible. The frank and full discussion about price should take place before the buyer makes an offer, not after.
Likewise, be wary of offers that are above the asking price. These are highly unusual in a buyer’s market. Gazundering is more often circumstantial than vindictive, but the rare buyer makes an enticing offer with the intention of lowering it further down the line.
Find a buyer that can move quickly. Cash buyers and those who are not part of a chain can close on a transaction more quickly. Set a prompt exchange date and push forward on the deal. The less time there is until completion, the less likely the buyer is to have a change of heart.
Request a deposit and sign an agreement. Taking a deposit could, in theory, reduce the likelihood of being gazundered. Asking a lawyer to draw up a contract is another preventative option.
But the nature of a property transaction means that the process could still unravel. Buyers are aware of this, and asking too much of them at the outset may only dissuade them from making an offer at all.
Ask for evidence of the reason for the lower offer. If you do find yourself a victim of gazundering, ask the buyer to prove the reason they gave for lowering their offer. If there is a good reason, the proof should be forthcoming.
What are ‘no-money-down’ scams?
No-money-down offers usually come from property agents, companies or ‘clubs’ or discount websites. The mechanics of the varying offers might differ, but there are common features: promises of high yields, immediate profit and no initial cash expense.
Often, scheme providers market a property below its open market value. They then entice buyers to apply for a mortgage based on the market value rather than the purchase price. The intent is to obtain a mortgage loan equal to or in excess of the price.
Why should you avoid them?
The minimum deposit needed for a buy-to-let mortgage is 15%. For even a modest property, this represents an up-front expenditure of several thousand pounds. Thus, cash-strapped investors might find the prospect of a no-money-down buy-to-let deal enticing.
But these deals almost always involve withholding information from, or giving false information to, a mortgage lender. Thus, the buyer could be guilty of mortgage fraud.
There are few legitimate ways to buy a property without a cash deposit. Deals that seem “too good to be true” should always invite caution and scepticism.
When you encounter such an offer:
- Perform your due diligence on the company offering the deal. A simple first step is to Google a company name to see if others have accused them of scamming. It is also easy to check company data using the Companies House website. Services such as www.duedil.com allow you to research a company’s directors, its financial health, and other important information.
- Discuss the details of the offer with the provider. Legitimate firms will always give as much information about their product as possible.
- Be wary if it seems that the deal will involve misrepresenting a valuation or hiding the source of a deposit, a side deal or any other cash incentive.
- Involve others. Ask colleagues, friends and family for their opinions on the deal. Consider getting an objective assessment from a financial or mortgage professional.
- Discuss the deal with your solicitor. The Law Society is clear that conveyancing solicitors can be liable if their client commits mortgage fraud. A reputable solicitor should be wary of no-money-down scams and be able to spot one with ease.
What are open viewings?
Open viewings and sealed bids are also more common during market peaks. During busy periods, agents and vendors might hold short, infrequent viewings where many buyers view the property at once.
Viewings are time consuming, and the vendor may wish to hurry the process. But open viewings can be a good way to induce a sense of competition and panic among buyers. This is truer still if they use sealed bids. Buyers panic, miscalculate and often overbid.
Should you avoid them?
If you are investing, it is important to keep the initial outlay as low as possible, as it will affect your eventual return. Inexperienced buyers are at most risk of overbidding in a high-pressure situation. But there is no need to avoid open viewings, so long as you keep a level head.
Set yourself an upper price limit based on your desired return and the property’s potential rent. The calculation below will give you this figure.
(annual rent) ÷ (gross yield %) = maximum purchase price
Be firm on this limit and don’t exceed it.
Remember that vendors don’t have to accept the highest offer. If a buyer appears more credible and can move quickly, their offer may be more appealing. If you are not buying with cash, be sure to line up a conveyancer and surveyor and have a buy-to-let mortgage agreed in principle before you place an offer.
What are ‘aggressive’ sales?
‘Aggressive commercial practices’ is a term that appears in the Consumer Protection from Unfair Trading Regulations 2008.
Estate agents often have agreements with local brokers and/or conveyancers to pass them business in exchange for a commission fee. Attempting to sell these ‘in-house’ services to customers is quite normal. But some firms might exploit customers by applying undue pressure to use these services.
A common tactic is to talk up the vendor’s determination to sell and the number of other buyers waiting to put in an offer. The agent will then suggest that using their in-house services is the quickest way to proceed.
How to avoid them
The 2008 Regulations define ‘aggressive commercial practices’ as sales tactics that impair the consumer’s freedom of choice. This makes applying pressure in the manner described above a criminal offence.
Estate agents should be familiar with the Office for Fair Trading’s guidance on property sales. If you encounter sales tactics such as this, remind the agent that it is illegal to hinder your freedom of choice. If they persist, the OFT can provide support and guidance.
Note that a mortgage lender may ask you to instruct a particular conveyancing firm. This does not constitute aggressive commercial practices. This is because the lender is not actually selling you the services of the solicitor.
The buy-to-let finance you choose is a crucial component of your investment. Always be sure you have the freedom needed to examine all your options.
To discuss your next buy-to-let mortgage with one of our expert advisors, call us on the number above or click the button below to enquire today.