The Importance of Backup Offers

With positive growth and record-low inventory levels in many markets, the scenario of multiple offers is once again back in the picture. I was recently reminded of the importance of a backup offer on a listing that is currently showing as “under contract.”

My client and I toured a home I considered a “super buy” — it seemed to be priced below market. The buyer loved it so much that she cried tears of joy and exclaimed, “I always told you that I’d know the best place when I found it, and this is it!”

We made a full-price FHA offer and lost the bid. We were in a multiple offer situation, and someone made a stronger offer. The idea of a backup offer hit me. I can count the number of homes in my town that I have sold this way, so I encouraged the buyer and pushed myself to pursue this route. Once we added an addendum to our original paperwork, I hand-delivered the documents to the listing broker. I did not know her and wanted to meet face-to-face, smile-to-smile.

Surprisingly, she was uninterested in pursuing this avenue; I found myself trying to guide her for the best interest of her seller so that ultimately she could earn her commission and close. Having my offer in a backup position, I explained, gave her seller greater reassurance of a sale. Not only would the seller have the primary contract but would also have a solid, pre-approved buyer as backup. Talk about having your cake and eating it, too!

Having encouraged the broker to move forward, we drafted the paperwork as a legal backup offer in first position. My goal was two-fold: not only did I want to be backup in case the first contract fell apart; I also wanted to be first in line in case other brokers were thinking the same way. I did not want to find myself and my buyer standing second or third in line.

In my experience, buyers are often reluctant to submit a backup offer because they feel it will strengthen the resolve of the buyers in primary position to move forward with the deal if they hit a rough patch, such as a previously unknown inspection issue. And this can happen, but I don’t let my worries overshadow my goal for the buyer of standing first in line should anything happen to the primary contract.

Submitting a backup offer shows good faith by placing money in escrow to demonstrate buyer seriousness. My backups are written the same as my primary offers. I include a provision in the backup position clause stating that the buyer can withdraw at any time until they are notified that the primary offer collapsed and their offer is the primary. If a new listing suits my buyer better, I want that option to withdraw without losing earnest money. I also make sure that language exists to protect my buyer and not allow inspections or money expensed until a written notification states that we are first. My buyer should not spend money until we know we have a chance to own the property.

About 10 days later, the listing broker called to ask if my buyer would still like to buy the home. Of course! I drafted an amendment in which I removed the backup status and placed us in first position as the primary contract for sale and purchase.

Lesson learned: the importance of taking the time to draft a backup offer and get it presented and fully negotiated to help facilitate a transaction for all parties involved. With the high fallout rate in the market, accepting a backup offer is usually worthwhile. Don’t simply wait for first deal to fall apart — be proactive and have someone committed to buy standing in the wings!

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