In real estate, a house isn’t sold until the Fat Lady sings at the closing. Until then, the seller should keep their options open by accepting backup contracts. Likewise, a buyer whose bid for the property fell short should consider asking the seller to accept their offer as a backup.
Simply put, a backup contract is one that moves into the primary position if the first buyer does not close. Some agents disdain them, but others love them.
Years ago, California agent Janine Nielsen’s client wasn’t just a backup – he was in 10th position on a short sale, and his offer was $50,000 below the accepted one. But a year later, the sale still hadn’t closed, everyone else had dropped out and Nielsen’s buyer won the day.
For a variety of reasons, roughly 20 percent of all sales fall through. Maybe the place doesn’t appraise at the hoped-for value, and the buyer can’t or won’t make up the difference. Perhaps the inspection reveals daunting flaws, or maybe financing falls through.
Or perhaps the buyer realizes they acted too hastily in an overheated market. Denver broker Joan Cox, who always encourages her agents to write backup offers, says that in a seller’s market, emotions often run high and decisions are made too quickly. After a day or two, hasty would-be buyers recognize they acted with their hearts, not their brains.
When Do They Make Sense?
While sellers cannot accept other contracts while one is still active, they can continue to market the property and accept offers, as long as those buyers are told they are in a secondary position.
Having standby buyers puts sellers in a stronger position. It places additional pressure on the first buyer to keep the original contract terms in place, and it saves sellers from having to put their homes back on the market.
For buyers, the odds aren’t terrific; a 20 percent chance of the first deal collapsing can seem like a long shot. But if you absolutely, positively want the house and are willing to wait, a backup offer makes sense.
To protect yourself, backup offers should be worded properly. Some states have standard backup addendums to cover these situations, but it may be a good idea to call in an experienced real estate attorney.
What follows is not intended as legal advice, especially since laws differ across the country. Rather, it is derived from what I’ve learned from numerous agents.
Get It in Writing
Too many sellers and agents play it too loose. A vague agreement to “hold” your offer as a backup holds no legal standing.
“A backup offer is only a true backup if signed by the other party,” said Phoenix agent Lynn Behlendorf.
“Whatever good intentions the listing agent and seller have towards giving you a verbal agreement,” said Maui agent Ralph Gorgoglione, “I guarantee there will most likely be another buyer willing to trump your verbally accepted offer.”
Be careful not to be locked in, at least not entirely. The idea behind a backup is that the terms and conditions are already agreed upon, and your offer will proceed to escrow without any further negotiation. But try to give yourself an out.
While you’re never totally tied into a deal, give yourself some time to cancel. The seller will (rightfully) want to limit your wiggle room, so 48-72 hours should be enough time to make up your mind. Sellers, on the other hand, should ask for a stipulated waiting period that, if exceeded, voids the offer.
Buyers also need to be careful they don’t tie themselves into numerous backup contracts on different properties. Otherwise, they could find themselves being forced to go to closing on more than one.
Get a Signed Response
If you do decide to move on, notify the seller and their agent in writing and demand a signed response that lets you out of the transaction. Ditto if you resolve to proceed: Make sure the first offer is canceled – again, in writing, signed by both parties.
And if the house didn’t appraise for the first buyer, it probably won’t for you, either. So, you can try to renegotiate as best you can. Perhaps the seller will agree to lower the price.
The same goes for the home inspection: Once problems have been uncovered, you must be informed of them. If the first buyers had an inspection, the seller must inform you of the findings if they were made aware of them. Consequently, the seller might be convinced to bargain based on the necessary repairs.
At the same time, in a market where prices are rising almost constantly, the seller may demand that you up your offer. But most will be satisfied there’s another contract waiting and that they can move on with their lives.
Indeed, if the seller already has a new home and needs to move forward, they’re more likely to bargain than to play hardball.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at email@example.com.