What Are Backup Offers in Real Estate?
What is a backup offer in real estate? How do Backup offers work? Some excellent questions for those buyers who have lost out on their dream home!
When buying a home, will writing a backup contract make sense? How about when selling a house?
A backup offer is simply a contract stating a buyer will purchase a home from a seller with agreed-upon terms if the primary contract is terminated.
It is a written offer that is legal and binding.
Should a homeowner consider accepting a backup buyer?
When competition increases in the 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.
Losing out on a home, of course, can lead to a lot of disappointment on a buyer’s 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?
There is what’s called a backup offer in real estate lingo, something you may want to consider.
Numerous times over the course of my career, clients have asked me how a real estate backup offer works. Let’s take an in-depth look so you can decide whether it’s right for you.
Accepting Backup Offers Explained
Keep reading, and I’m going to give you a comprehensive explanation of what you need to know about backup offers. You could find yourself in a position where you might want to use this tactic in your real estate transaction.
A contract has been signed between the first buyer and the seller, but this does not mean that the sale will go through. The first offer could fall apart.
There is a host of various reasons why this may happen – including lots of home inspection issues, buyer financing, or just plain cold feet on the buyer’s part.
Deals fall through all the time. Multiple real estate contingencies need to be met often before a transaction is signed, sealed, and delivered.
If you have made a backup offer and one of the contingencies is not completed, 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. If the primary offer with the first buyer doesn’t happen, your agreement takes effect.
You immediately go into 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 determine exactly how backup offers work in your particular state from your real estate agent.
Do Backup Offers Get Accepted?
Yes, they do! Backup offers are quite common. In many real estate deals, something happens which causes a buyer to back out.
With so few houses available in today’s market, buyers can be in a backup offer position if the first contract fails.
It is almost always in the seller’s best interests to have a second offer waiting in the wings. So when someone asks are backup offers worth it, they certainly could be.
It should be made clear that a seller doesn’t necessarily have to accept the 2nd best offer in a bidding war as-is. Counter offers are perfectly acceptable in a backup offer situation.
For example, maybe you want a higher price. The buyer could have offered a time frame for closing that was unacceptable.
Before accepting a buyer’s backup offer, it is certainly not a waste of time to get the terms you want.
After all, the current deal could fall through. When accepting backup offers, it makes sense to get your desired conditions as you did with the first prospective buyer.
Why Do Sellers Take Backup Offers?
There is a solid reason why a seller might want to accept a backup offer – nothing is certain in life. Home sellers often will take what they perceive to be the best offer, but for whatever reason, it falls through.
For example, during a home inspection, an inspector could point out a significant problem. The issue might cause the buyer not to want to move forward.
The home inspection contingency is likely going to allow the buyers to terminate the deal. Accepting backup offers would allow a secondary buyer to be in a primary position to get the house.
For sellers, they don’t have to worry about putting their home back on the market and going through the whole process again. A good backup offer prevents the owners from showing their home numerous times again until a new buyer is found.
Is a Backup Offer Binding?
If the real estate market is super hot and favors home sellers, there is a strong chance a bidding war could take place. Bidding wars often happen when there is far more demand than there is housing available to purchase.
When a primary contract is terminated, and the original buyer backs out, it opens the door for a second buyer. Being in a backup position puts a second potential buyer in place to move forward.
Buyer number two is now in the first position to land the property they really wanted. However, what home buyers need to understand is that a backup offer is a legally binding contract.
An accepted backup offer is an executed contract that needs to be followed just like the first accepted offer. If you are unsure of any aspect of the purchase contract, you should get legal advice by consulting with a real estate attorney.
Can You Withdraw a Backup Offer?
A buyer could withdraw their backup offer; however, they’re still obligated to follow the purchase agreement. If the current buyer does not follow the contract, they would be open to losing their earnest money deposit held in escrow.
Lots of buyers ask their buyer’s agent if they put earnest money down on a backup offer. The answer is YES, which could be lost when the contract is not adhered to, just like the first deal.
Whenever entering into any offer situation, it is vital to know you really want the property.
Avoid Contractual Interference With Backup Offers?
Homeowners need to be very careful in the situation of accepting backup 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 home’s price.
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 mistreated.
In the circumstances like these, sellers and their agents need to follow the letter of the law strictly.
Get a Signed Release of The Contract
We live in a sue-happy society! If a sale goes south, it is highly advisable to get a signed release from both parties.
This legal document will state that the parties will release each other from any obligations that may have arisen due to the signed contract.
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 excessive? 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 seller’s concession or repair for something clearly visible before you made your offer.
For example, if the seller tells you one of the bedroom windows has lost its 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 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 read is 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 straightforward. A backup offer must be presented to a seller unless they have told you otherwise in writing. I have never received anything from a seller stating they don’t want any more offers in my thirty-four years, and I probably never will!
Here are the pros and cons of submitting a backup offer:
Pros of Submitting a Backup Offer For Buyers
Eliminate The Competition With a Backup Offer
A backup offer in real estate can certainly end up being successful for a home buyer. 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 purchase offer to accept it and not put it back on the open market. This can be appealing in a highly competitive market with low inventory.
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.
Some buyers think it may be a long shot, but that is not necessarily the case.
Beating Other Real Estate Backup Offers
Can there be more than one backup offer submitted to a seller? Yes, there sure can.
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 sequence 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 new home meets all of those criteria. This dream home situation can be very motivating and also very stressful.
If you have to have this home, 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 their 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 first buyer could look over things that would normally make them avoid the sale, like inspection problems.
You Are Under Contract
You will probably still look at homes while 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, be priced lower, or be in a location where 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.
As mentioned previously, a backup contract has legal ramifications.
Do You Really Want It?
If the initial buyer determines that they do not want the home, it will probably be for a good reason. Maybe the inspection showed that the roof is falling apart. Could the buyers have discovered the neighbors are really unpleasant?
Maybe home prices have been dropping quickly, and they realize the offer made was too much. These are just a few quick examples of why someone could change their mind.
Having a lot of competition can lead to quick irrational decisions. 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 go out looking at more houses. 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 an inspection?
Things can get very complicated, very quickly.
Are There Any Downsides of Backup Offers For A Seller?
Are there any disadvantages of accepting backup offers from a seller’s standpoint?
In other words, accepting backup offers vs. pending.
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.
MLS boards may operate differently in different states, so it will be a good idea to ask your real estate agent.
You might automatically assume accepting backup offers is the way to go. I say not so fast! You need to understand this – When you mark a property pending, the days on the market come to a complete halt.
So if your home was on the market for 2 weeks and some reason it comes back on the market, the days on the market will read 14.
If you mark your property as accepting backup offers, for whatever reason, the days on the market continue to accumulate.
Let’s say you mark as receiving backup offers, and you want to wait until the buyer’s financing is consummated.
The typical time to get financing from a lender is four to five weeks. For a minute, let’s assume the worst, and the buyer does not get their financing.
When your home comes back on the market, those 5 weeks will show!
Extended Days on Market is a Detriment to Home Sellers
Any good real estate agent knows that time on the 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 the 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 backup offers, you have artificially inflated the days on the 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 will not bother showing a home that is marked as accepting a backup offer. Why?
Most agents are going to believe the chances of the house coming back on the market are remote. Why waste 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 homes pending. I don’t want to see my client’s home have their days on the market become artificially inflated when the chances of the house being shown are slim.
I should clarify that just because a home is marked pending doesn’t mean a buyer couldn’t put in a backup offer. They certainly could.
Backup Offers May Not Be a Good Idea With Short Sales
One circumstance where a backup offer may not be a good idea for a seller is a short sale. When you need short sale approval from mortgage lenders, locking yourself in with terms they won’t accept isn’t a good move.
You may learn by going through the primary deal that better terms are needed in order for a lender to accept. Having an active contract with a second buyer may not be the right move.Having closed on over a hundred short sales in my career, I would never recommend a backup offer in a short sale.Click To Tweet
Discuss Backup Offers on a House With Your Realtor
Backup offers can be useful when 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 they say. Your agent can help you map out your strategy. With a good plan, you can make sure that you get the right home for your needs while avoiding unnecessary problems.
Hopefully, you now understand exactly how a backup offer works!
Additional Resources on Real Estate Offers
- How to handle multiple real estate offers – get solid advice on managing offers when you have more than one. There are specific strategies you will want to follow when you have multiple offers.
- Backup offers and bidding wars – see more helpful guidance on what you need to know when dealing with a backup offer in real estate.
- Why accepting offers contingent on a home sale is real estate fools gold. Learn why home sale contingencies, more often than not, do not benefit sellers. Having a home sale contingency in your contract increases the probability your transaction will not be completed.
Use these additional resources to make sound business decisions when evaluating 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 accepting backup offers in real estate was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at email@example.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 34+ Years.
Are you 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.