Simple Pound

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After I have been going on and on about the housing market, Jay from Fool.co.uk made me aware of a recent article they’ve published on the Fool website. He asked me to comment on it and share my thoughts about the topic with the world… and as you know, I’m quite happy to announce my opinion

First of all, here is the article we are talking about. If really can’t be asked to go and read it, I shall give you a brief summary of what it is all about. Gazumping. That’s what it’s all about. I can clearly see the question marks above your heads right now - which is why I told you to go and read it, but if you prefer here’s a definition courtesy of reference.com.

“The verb gazump means to refuse to formalise a sale agreement at the last minute in order to accept a higher offer.”

If you read on you learn that this word became ganster slang in the 1920s. How exciting! Anyway - Gazumping was a common phenomenon in the UK in the late 80ies when house prices seemed to be rising endlessly (does that sound familiar?) because a buyer’s offer is not legally binding until there is a contract of sale. Alison’s article provides you with five tips that should help protect you from being gazumped.

Her first piece of advice is to insist that the property is removed from the market immediately after the sale has been agreed. More often than not, properties that have already been promised to a buyer continue to be advertised on the market, thus increasing the chances of another buyer outbidding the first offer price. Since this will mean more commission for the estate agent (whose fees are usually expressed as a percentage of the sales price), he will be quite happy to pass on the higher offer to the seller who then might be tempted to accept the higher bid.

Unfortunately, taking the property off the market is no guarantor for not being subjected to higher bids, especially if the place you’ve set your heart on is very popular and many have had the chance to see it before you. Talk to your estate agent to get an idea of how many people have viewed the property before you and how many of those seemed interested enough to be of potential danger to you. While this will still not necessarily prevent anything from happening, at least you’re prepared and can speed up the drafting of the contract as much as the situation requires.

Further, Alison advises you to sell your own property before making an offer for the next. This would prevent the sale from being delayed on your side and hence the seller looking for someone who’s more prepared and ready to buy than you. Alison suggests you stay with parents or friends, or even rent while shopping around for properties. While this is certainly sound advice, there are a few things to bear in mind. Firstly, moving in with your parents or accepting your friends’ hospitality is fine for a couple of days or even a few weeks but is likely to get very annoying in the long run. You don’t ever want to over-extend your welcome if you still intend to be friends with those people afterwards.

Secondly, while renting is a lot more flexible than trying to sell a house before moving, make sure that the lease period suits your needs. There is no point in having a 6-months contract for a flat if your house is ready for you to move in after a month. Further, renting a property adds more expenses to your list that are potentially unrecoverable - think estate agent fees, inventory charges and the like. Plus you will have to move all your stuff twice, which doesn’t just add to your bill but also increases the likelihood of any accidental damage done to your property.

Her next advice on how to prevent gazumping is to exchange contracts as quickly as possible. I have no buts and ifs for this advice since I believe that it’s probably the best (if not only?) advice to prevent the seller from looking for someone else. Obviously, you shouldn’t rush buying something that you’re not 100% happy with and don’t dismiss all the essential checks like water, heating, doors and window locks, neighbours, area, transport and so on and so forth. There’s no point buying a property only to find out later that the entire electricity wiring will have to be replaced.

But as soon as you’ve made up your mind, do everything possible to speed up the selling process. In the end, it’s a win-win situation as you get your house quicker while the seller gets his cash. Stay in touch with your seller to make sure he knows you’re keen on the house and you’re doing your best to tie up lose ends. Tell him what’s going on and what the progress is with bureaucratic matters that will inevitably take quite some time to get resolved. But don’t call him up every day just to have a chat. He’s not supposed to become your friend, but simply a good business contact. Don’t annoy him with updates, just make sure he knows what’s going on.

Your final option, according to Alison, is drawing up a contract (or, more specifically - have a solicitor do it for you) that will guarantee you exclusive rights to the property once the sale is agreed. While this is certainly a valid option and will bring the law onto your side, it will also involve further costs, errands and admin tasks. To be honest, I am not quite sure what to think about this option. While it would make you win in court, drawing up an agreement like this could be destroying all your hard work that you put in to establish a good relationship with the seller.

I would probably rely on my gut instinct to decide whether the benefits of this contract would potentially outweigh the drawbacks. However, if you decide to have this contract written for you, be weary if the seller refuses to sign - chances are he’s trying to put his best interests well above yours. No matter how nice the property is, if he refuses to give you exclusive rights to it after he’s accepted your offer price, I would rather walk away than invest a lot of time, money and effort in a property that’s likely to be offered to someone else while you’re discussing the sale contract with your solicitor.

Unfortunately, there is no guarantee that you can avoid being gazumped, so all I can do is join Alison in wishing you the very best luck with your home purchase!

More tips on how to avoid gazumping here.

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I’ve been eagerly watching the house price inflation and several house price indices for the past months. I strongly belive that the market is currently immensely overvalued and will have to face a correction at some point in the near future. How soon this will happen is not necessarily clear and for the sake of stability I’m hoping that we won’t see an actual crash but a slow downturn.

According to some sources we would have to see a 50% fall in house prices over the next few years to restore the long term average. This figure even exceeds the 30% decrease in property value the UK experienced in the early nineties and hence seems a little too pessimistic. On the other hand, countries like Japan have shown how easily a bubble like this can burst - after years of recession house prices are still below their 1990 average! If the same scenario was to happen to the UK the average house would cost £70,000 instead of £180,000 (£340,000 in London).

According to the latest figures released by the Landregistry we are certainly seeing a slow-down in growth - which is hopefully a start for more reasonable and hence affordable property prices. With an increase of only 0.1% in July it is not entirely unreasonable to assume that we’ve reached a price plateau. In fact, London is probably the number one factor why we are still experiencing a positive house price inflation. While the countrywide annual inflation currently stands at 8.8%, London tops the list with a 15.5% inflation since July 2006.

This inevitably leads to first-time buyers struggling to get onto the property ladder and choosing to rent instead. According to the Royal Institution of Chartered Surveyors (RICS) first-time sales are tumbling at their fastest rate in more than three years. Countrywide the number of sales transactions has decreased by almost 10% in the last year only, but at the same time the price tags of the sales exceeded the £2,000,000 mark much more often. Sales of less than £250,000 decreased by nearly 25%, which is probably the first-time sales we’re looking for.

If you want to dig even further into the details, Cliff @ Fool.co.uk provides a good overview of the London boroughs that have experienced a decrease in house prices so far. He breaks it down by property type (flat vs. terraced vs. semi-detached etc.), which should give you a good idea of where to not buy at the moment if you know what you’re looking for.

Further, Ed @ Fool.co.uk supports my view that a fall in house prices is simply a matter of time by now. He discusses topics like the subprime mortgage crisis in the US and it’s likely impact on the UK market (a hypothesis supported by this ABN Amro paper) as well as some other macroeconomic points that are worth considering.

If you think this is all far too serious, you should definitely watch this.

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