Complain all you want about how tough Toronto’s real estate market is, but as with anything else in life, you can always find something worse.
Under-listing, bidding wars, bully offers – Toronto’s 2015 real estate market is unfair, right?
Well let me introduce you to a little-known term that comes from our good friends in the United Kingdom. It’s known as “gazump,” but to the people it happens to, it’s known as “gazumped.” For those who experience it every day, it’s “gazumping.”
Whatever you want to call it, just be thankful it doesn’t happen here in Toronto…
Do you know what one of the most frustrating aspects of gazumping is? Spelling it.
I swear, it took me twenty minutes to find it on Google.
Gazunk, I thought.
It’s a lot harder to spell than you’d think, and while you all read the subject line, imagine hearing an old British dude use the word in the middle of a conversation, and then try and figure out what he was saying a week later…
Here’s how Wikipedia explains Gazumping:
Gazumping occurs when a seller (especially of property) accepts an oral offer of the asking price from one potential buyer, but then accepts a higher offer from someone else. It can also refer to the seller raising the asking price at the last minute, after previously orally agreeing to a lower one. In either case, the original buyer is left in a bad situation, and either has to offer a higher price or lose the purchase. The term gazumping is most commonly used in the UK and Australia, although similar practices can be found in some other jurisdictions.
With buoyant property prices in the British residential property market of the late 1980s and early 1990s, gazumping became commonplace in England and Wales because a buyer’s offer is not legally binding even after acceptance of the offer by the vendor. This is because, by s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 and in order to prevent dishonesty, a contract for the sale of land must be in writing, a requirement of English law that dates back to the Statute of Frauds of 1677. This requirement was originally intended to promote good faith and certainty in land transactions.
When the owner accepts the offer on a property, the buyer will usually not yet have commissioned a building survey nor will the buyer have yet had the opportunity to perform recommended legal checks. The offer to purchase is made “subject to contract” and thus, until written contracts are exchanged either party can pull out at any time. It can take as long as 10–12 weeks for formalities to be completed, and if the seller is tempted by a higher offer during this period it leaves the buyer disappointed and out-of-pocket.
The only thing unclear to me at this point is whether the original contract need be oral, or written.
I completely understand the idea of “gazumping” if the original contract is oral. An oral contract is not a contract. I do not have a law degree, but even in a 4th year university “Business Law” course, we were introduced to the Statute of Frauds. I don’t think any contract is really enforceable without having it in writing, unless you and a buddy make a bet, shake hands, and consider it a “gentleman’s bet.”
If somebody called me on the phone and said, “David, my client will give you $268,000 for your listing on Front Street, do you accept,” if I said, “yes,” then what does that really mean?
But I suppose the confusion has to do with the way that real estate is sold in the United Kingdom.
I don’t understand what constitutes an “accepted offer.”
And who makes an oral offer?
Is this the problem? Are folks in the UK going around saying, “I’ll give you seven hundred quid for your flat,” and believing that this constitutes an offer?
Here’s another explanation I found on a law blog from the UK:
The problem is that until contracts have been exchanged, the sale agreement is not legally binding. Once your offer has been accepted, either you or the seller can pull out at any time until the exchange of contracts. Unfortunately agents are legally obliged to inform sellers of all offers made on their property, even after one offer has been accepted. But during this period between the acceptance of your offer and exchange, you as the buyer spend a considerable amount of money on surveys, solicitor’s fees, and confirmation of your mortgage offer. If the sale falls through you do not get this money back, and have to fork out all over again next time round – that is, unless you have been put off the idea of buying a new home. If you are part of a chain of sales, you could even be affected by someone else being gazumped.
What does this mean?
“Until contracts have been exchanged.”
“Once your offer has been accepted, either you or the seller can pull out at any time until the exchange of contracts.”
It’s confusing as hell, and while we can get past the language barrier in a few seconds to understand that a “brolly” is an umbrella, I think we’d have to forget everything we know about Toronto real estate in order to understand how it works in England.
What is the “exchange?”
Whatever it is, it sounds like that’s the point when the offer goes firm.
Think about how we have conditional agreements in the Toronto real estate market. If you purchase a condominium, you may put in conditions on mortgage financing, or a satisfactory review of the condominium corporation’s finances. Once you sign the waivers and make the deal firm, then that’s the date for buyer and seller to breathe that sigh of relief, and know that the deal is, for lack of a better term, “all good.”
In the UK, it seems there is a gap between the “acceptance of the offer,” and the “exchange of contracts” whatever that may be.
In this time, nothing on paper is worth a damn.
Here’s a rather scary graphic about the percentage of buyers in the UK who have been gazumped:
And it creates a domino effect that reverberates through the entire market.
Imagine that you buy a house in Riverdale, and then you sell your condo on Front Street in anticipation of moving to Riverdale. Five weeks later, you find out that you were “gazumped,” and you’re no longer the buyer of the Riverdale house.
Now, you have no choice but to pull out of the sale of your condo on Front Street.
But the buyer of your condo on Front Street sold his condo in Mississauga in order to move to Toronto, so he has to pull out of his sale as well.
The buyer of the Mississauga condo, who was looking forward to moving out of his mother’s basement, now has to face another two months of mom turning the heat up to 85-degrees at night so she doesn’t “catch a chill.”
And so on…
I still, for the life of me, don’t fully understand gazumping.
The “why” isn’t even the issue. It’s about money.
But the “what” isn’t clear!
I’ve heard about buyers being gazumped the day before closing! So what does this “exchange of contracts” refer to? Is that what they call “closing?”
Wouldn’t that be something?
If you could be gazumped at any point from the day you have an “accepted offer” up until closing?
Imagine buying a house today – March 2nd, and agreeing on a 90-day closing. Then almost three months later as June approaches, the seller says, “Sorry, I have a higher offer. Best of luck.”
What do you do?
I can’t believe the market works like this, and the more I read on gazumping, the more I think, “This can’t be true. This can’t really happen.”
It’s not like we’re talking about some corrupt, unsophisticated country here. It’s the home of our dear Queen!
Say what you want about the real estate market in Toronto and how tough it is. But just imagine how much tougher it would be if we threw gazumping into the mix.
Think about that $599,000 listing that gets 18 offers and sells for $767,000. Now imagine that five weeks from now, the guy who bid $701,000 and got absolutely creamed, decides to come up to $780,000 and gazump the high bidder at $767,000.
It would be chaos.
I never thought I’d say this, but after reading about the market in England, I think I’m okay with the way things work here.
Now if you’re reading this, and you happen to be British, please shed some light on this practice of gazumping.
Either we’re missing something here, or you guys over there are missing a LOT…