How Do Backup Offers Work?
What is a backup offer? An excellent question for those buyers who have lost out on their dream home!
When competition increases in a housing market, it can sometimes be difficult to find an ideal home before another buyer gets to it. It is not uncommon to find the perfect home right as another buyer has signed a contract with the seller. This, of course, can lead to a lot of disappointment on a buyers part.
You think your dream home is in your grasp and then suddenly you find out it has been stolen right out from under you by another buyer. So what do you do? In real estate lingo, there is what’s called a backup offer, something you may want to consider. Numerous times over the course of my career clients have asked me “how do backup offers work”?
The Backup Offer Explained
So how exactly do backup offers work?
A contract has been signed between the first buyer and the seller, but this does not mean that the sale will go through. There is a host of different reasons why this may happen – including lots of home inspection issues, buyer financing, or just plain cold feet on the buyers part. Deals fall through all the time. If you have made a backup offer and this happens, you could find yourself first in line to buy the house.
Depending on the state you reside in, a backup offer could become a legally binding contract. When the sale with the first buyer doesn’t happen, your contract takes effect. You immediately go into the process of purchasing the home for a price agreed upon in the backup offer. If you decide you don’t want the house, you will have to leave your good faith deposit behind. It becomes imperative to find out from your real estate agent exactly how backup offers work in your particular state.
What about contractual interference?
Homeowners need to be very careful in the situation of accepting back up offers.
Let’s say the seller had their home on the market for $500,000 and accepted an offer from buyer #1 at $480,000. Buyer #1 does a home inspection and is completely unreasonable with the seller and starts to make outrageous demands for repairs or money off the price of the home. If the seller in this circumstance knows that buyer #2 has a backup offer on the table for $495,000 they could do everything possible to get buyer #1 to back out of the sale. This could potentially create a situation where customer #1 is treated unfairly.
In circumstances like these sellers and their agents need to make sure they follow the letter of the law exactly. We live in a sue happy society! If a sale goes south, it is highly advisable always to get a signed release from both parties. This legal document will state that the parties will release each other from any and all obligations that may have arisen as a result of the contract that was signed. As a real estate agent, you better get this signed before even thinking about having a seller accept a backup offer.
This isn’t to say that a seller should do anything a buyer wants them to do. In fact, real estate markets dictate decisions like these. If three other interested parties are waiting in the wings, a customer needs to make damn sure they want to ruffle a seller’s feathers or not. Over the years I have seen some unreasonable home inspection requests. You might be thinking what’s unreasonable? In my opinion, you are asking for trouble if you use a home inspection for the sole purpose of renegotiating the contract.
By re-negotiate, I mean asking for a credit or repair for something that was clearly visible before you made your offer. For example, if the seller tells you one of the bedroom windows has lost it’s seal and is cloudy don’t ask them to give you a new window. You had noticed this defect before you made your offer. The seller also pointed it out in writing in their disclosure statement.
Could a seller use a backup offer as leverage for keeping a buyer’s requests to a minimum? Yes, they sure could!
Do Real Estate Agents Have to Submit Backup Offers
You may be wondering if real estate agents are obligated to submit backup offers. Again this is probably a dependent on the state in which you are located. Here in Massachusetts, an agent must present a backup offer. The legal language that Realtors are bound to reads as follows:
“All offers submitted to brokers or salespeople to purchase or rent real property shall be conveyed forthwith to the owner of such property.” If a listing agent is a Realtor©, they have an additional ethical obligation to continue to submit to the seller all offers and counter-offers until closing unless the seller has waived this obligation in writing.”
Rules regarding presenting offers are clearly spelled out in the National Association of Realtors Code of Ethics.
The language here is pretty clear. A backup offer must be presented to a seller unless they have told you otherwise in writing. In my twenty-nine years, I have never received anything from a seller stating they don’t want any more offers and I probably never will!
Pros of Submitting a Backup Offer
By submitting a backup offer, you could potentially wipe out any possible competition you could have for the home should the first sale fall through. The seller may think enough of your offer to accept it and not put it back on the open market. This can be appealing in a highly competitive market. You and the seller can consummate a binding contract for an already established price. You don’t have to worry about anyone else swooping in to take the house from you.
Beating Other Backup Offers
For a home that everyone wants, there may be several backup offers. By getting yours in first, you could be first in line after the primary sale fails. Should you wait and place your backup offer later, you may be in line behind another buyer with a backup offer. Being second in line makes it even less likely that you will get the house.
Getting The Home Of Your Dreams
You may know exactly what you want and need in a home, and this particular home meets all of those criteria. This dream home situation can be very motivating, and also very stressful. If you just have to have this home, then your backup offer will guarantee that you get it should the original sale fall through.
Cons of a Backup Offer
Motivating The Primary Buyer
There are a lot of things that can cause a buyer to back out of a deal. But when you place a claim on the house, you show that the property is desired. This can cause the initial buyer to feel protective of the sale, even when it goes against his or her better judgment. People are predictable this way – when someone else wants something, it naturally makes the person in possession of the desired item want it more. The buyer could look over things that would normally make him or her avoid the sale, like inspection problems.
You Are Under Contract
You will probably still look at homes while you are waiting to see how the backup offer plays out. During this search, you may find another home that works just as well. It may even be better, or be priced lower, or be in a location that you want to live in more. The only problem is, you are now obligated to buy this other home if there is a contractual agreement made with the seller. This is not a situation anyone wants to be in.
Do You Really Want It?
If the initial buyer determines that he or she does not want the home, it will probably be for a good reason. Maybe the inspection showed that the roof is falling apart. Or maybe the neighbors turned out the be really unpleasant. Maybe home prices have been dropping quickly and he or she realizes the offer made was too much.
Now you have to ask yourself, is the house so great that you are willing to overlook such problems? Often, if the first buyer has a major issue with the house, you will have the same problem. Do you really want to be contractually obligated to take on such a property?
Causing Problems With Further House Hunting
When you make a backup offer, it can really interrupt your ability to search for another home. You don’t know if you should wait to see what happens with this home, or if you should just go out searching. But if you find something you like, do you make an offer? You will have to lose your good faith money should the backup offer go through. What if you make an offer on the second house, lose your money from the backup offer, and then discover that the second house has problems after inspection? Things can get very complicated, very quickly.
What Are The Pros and Cons For A Seller?
We have discussed a backup offer from the point of view of a buyer but what about the seller. Is there any advantages or disadvantages of accepting back up offers from a sellers standpoint? The answer to this may surprise you! In Massachusetts, the Multiple Listing Service gives you two options when an offer is accepted on a property. There is what’s called “contingent” or “accepting backup offer” or under agreement as selections a real estate must make.
You might automatically assume accepting backup offers is the way to go. I say not so fast! What you need to understand is this – When you mark a property under agreement the days on market come to a complete halt. So if your home was on the market for 2 weeks and for some reason it comes back on the market, the days on market will read 14.
If you mark your property as accepting back up offers, for whatever reason, the days on market continue to accumulate. So lets say you mark as accepting backup offers and you want to wait until the buyers financing is consummated. The typical time to get financing is four to five weeks. Lets for a minute assume the worst and the buyer does not get their financing. When your home comes back on the market those 5 weeks will show!
Any good real estate agent knows that time on market is your enemy in real estate. Every astute buyer asks their real estate how long a home has been on the market. Extended days on market are one of the major signs of an overpriced home. The thinking is that the longer it’s been on, the greater chance of negotiating a better deal. So by marking a home as accepting back up offers you have artificially inflated the days on market. This is not a good thing.
What sellers really need to understand is that here in Massachusetts, you are really not accomplishing all that much by marking your property as accepting backup offers. I would estimate that 95 percent of the time an agent is not going to bother showing a home that is marked as accepting back up offers. Why? Most agents are going to believe the chances of the home home coming back on the market are remote. Why waste the time showing a home that a buyer could love but more than likely can’t have?
In most circumstances I recommend to my clients that they mark their home under contract. I don’t want to see my clients home have their days on the market become artificially inflated when the chances of the home being shown are slim.
What I should make perfectly clear as well is that just because a home is marked under contract doesn’t mean a buyer couldn’t put in a backup offer. They certainly could.
Discuss With Your Realtor
Backup offers can be a useful tool when you are trying to buy a dream home, but they can often create more headaches than they are worth. This does not mean they are not worth pursuing in certain circumstances, but be careful. The best thing you can do is discuss your ideas with your Realtor and see what he or she says. Your agent can help you map out your strategy. With a good strategy, you can make sure that you get the right home for you needs, while avoiding any unnecessary problems. Just be sure you understand exactly how a backup offer works!
Additional Resources on Real Estate Offers
- Is making a backup offer a good or bad idea via Realtor.com.
- How to handle multiple real estate offers via Maximum Real Estate Exposure.
- Backup offers and bidding wars via Massachusetts Real Estate Law Blog.
- Why accepting offers contingent on a home sale is real estate fools gold via Maximum Real Estate Exposure.
Use these additional resources to make sound business decisions when trying to evaluate your options in a real estate transaction. Be sure you understand whether a backup offer makes sense for your situation.
About the Author: The above Real Estate information on what is a backup real estate offer was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 29+ Years.
Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.