How much the offers drop
The drop in offer price can often be tens of thousands of pounds. Only recently have we come across a case where a seller was initially offered £250,000 for their home only to have it dropped down to £203,000 at the last minute. A drop of nearly 20% or £47,000! Now you might say to yourself that you would never accept this if it happened to you but we see it time and time again that people are forced to accept due to the pressure that their circumstances put them under.
Is gazundering legal?
Yes, this practice is completely legal in the eyes of the law. However it is completely immoral for a company to use this tactic as standard practice as they are misleading customers from the outset.
The Code of Practice for Residential Property Buying Companies section 5c states;
“You must not reduce offer prices late in the process without a valid reason and you must avoid putting undue pressure on the house seller which restricts their ability to make free or informed choices”
This is the provision in the Property Ombudsman guidelines (which companies have to sign up for to join the NAPB) that essentially prohibits gazundering. Although it is the phrase “without a valid reason” which provides leeway to the quick sale company as it is not clearly outlined what a valid reason is.
There are genuine valid reasons why an offer might need to be lowered, read our article about “valid reason a cash house buyer might lower your offer”.
How you can avoid being gazundered by a Cash House Buyer
The unfortunate thing is that if you choose the wrong quick sale company, gazundering is inevitable. So how can you avoid it?
There are a few things that you can do to reduce the chances that you will be caught out by this tactic;
- Read the company reviews – the first thing that you should do is check the company reviews, go straight to the 1,2 or 3 star reviews and see what the customers are saying. Here you are looking for evidence that suggests the company is lowering offers at the last minute. Disgruntled house sellers will often leave detailed bad reviews of their experience. One or two reviews with evidence of offer reductions could be acceptable, there are valid reasons for a company to reduce their offer. The key things to look out for are mentions of last minute offer changes,as these are rarely warranted. Also the sheer number of reviews that mention offer changes could be an indicator that it is standard practice for the company.
- Ask yourself “is the offer too good to be true” – often it’s the companies that make much higher offers than the rest of the companies which are more likely to be gazundering. Remember no genuine company will ever offer any higher than 85% of what your property will sell for and in most circumstances the offer will be around 80%. A company can only offer up to 85% in certain circumstances, for more information on these circumstances you can read our article here (article). If a company is offering you 85% without asking any questions around your circumstances this should be a point of concern. If they are offering any more than 85% this is a big red flag.
- Are they asking you to sign a contract? – Another thing that companies that guzunder will do is ask you to sign a contract with them, often these contracts will state that if they do gazunder you you are free to walk away from them without charge, however, this does give them the ability to drag out the sale as long as they need to in order for you to become more and more motivated to accept whatever offer they throw at you after giving you the runaround. You can read our article on what to look out for in cash house buyer contracts here.
Tactic 2 – The Option Agreement (AKA the “the bait and switch”)
What is an option agreement?
Option agreements are contracts that give a buyer the option to purchase property at an agreed price or transfer it over to another buyer.
There are places for option agreements to work extremely well for both parties in a transaction but it’s certainly not in a situation where a home seller is looking to sell their home at a discounted rate for a quick sale.
The reason for option agreements
A good example where an option agreement works well is, say for example you had a big plot of land to the side of your property, you knew that there was scope for planning but you didn’t want to incur the architect’s costs, planning costs or even go through the hassle of dealing with the planning application.
A local developer could agree on a contract where they would take an option to buy your land but only on the basis that it got planning permission for a development. This option might last for a couple of years, and they have this time to incur all of the time, trouble and cost that it takes to secure planning.
If successful they can exercise their option to buy the land at a pre-agreed price that you are both happy with, if the planning is not successful then they are under no obligation to exercise their option but you can’t sell the land to anybody else until the contract has expired, they have incurred the cost and it didn’t move forward, you haven’t lost anything and it was a fair and transparent deal.
Option agreements in the quick house sale sector
Unfortunately some companies in the quick sale sector have come up with a creative way of using this legal vehicle, to tie you and the sale of your property to them for a certain amount of time.
If you have signed an option agreement with a company it means that they are unlikely to actually be purchasing the property from you themselves. Instead what they are planning to do is try and sell your property to a third party for a higher amount than the price you have agreed with them.
This means that if you have agreed to sell to the company for £200,000 (80% of it’s full market value of £250,000) instead of them buying it from you they find someone who is willing to pay £220,000 for the property, sell it to them and pocket the £20,000.
That’s great if it’s happened in a time frame that you are happy with but bearing in mind that you have gone to them for a quick, hassled-free sale, this could end up being far from that. Companies using option agreements will often just try their luck at selling the property on the open market. It will be on Rightmove the day after you sign the contract and they are just doing the job that any estate agent would except they don’t really care about getting the best price for it. They will just keep lowering the asking price until they find a buyer. As long as the final price is more than the amount they agreed with you they are making money.
Another issue with this is the timeframe. A tie-in with an estate agent will often be 2 to 3 months after that you can take your business elsewhere. An option agreement can be from 6 – 12 months. It also gives the company the right to put a charge on your deeds which means you can’t sell your property with anyone else until the option expires. Hardly the quick house sale that you were looking for!
How you can avoid an option agreement
Avoiding falling into the option agreement trap is fairly straightforward;
- Ensure that you are dealing with a “true” cash house buyer – Ask the company if they are actually who will be buying your house or if they are just sourcing a third party buyer . This isn’t foolproof as companies can and do lie about this. There is also a gray area where companies offer both a house buying service and a “brokerage” service.
- Avoid signing any contracts that mentions an option agreement – the simplest way to avoid getting tied in to an option agreement is to not sign a contract at all. The majority of true cash house buying companies will not ask you to sign a contract. If you are dealing with a company that sends you a contract read it carefully and seek legal advice if you are unsure about anything.