Back-Up Offers in Real Estate

Waste of Time or a Valuable Ace up Your Sleeve

Picture this.  You’re a busy homeowner with an offer in hand.  The closing on your old home is scheduled just a week away.  Your new home, a few streets, cities or states, away can’t close until your old home does due to your lender and that pesky underwriter.  Moving boxes are all packed, the trucks are reserved and your mail forward dates are already set.  All that’s left is to sign on the dotted line at the closing.  But then the buyer for your home backs out and the entire deal comes to a screaming halt.  That is, unless you had a back-up offer in hand.

The above scenario may sound like something out of a horror novel, but it’s exactly what happened to a Tennessee couple featured recently in an article in the USA Today off-shoot, The Tennessean.  While it seemed like instant disaster was about to strike, the realtor in the case of the TN couple had the presence of mind, and probably some good old fashioned experience, to take a back-up offer on the home.  So now we know that back-up offers can resuscitate an otherwise failed real estate sale.  So what is this magical device and why do you as a seller, or buyer, need to care?

What are Back-Up Offers

According to the official publication of the National Association of Realtors, a back-up offer is defined as “an offer that is accepted contingent on the fall through or voiding of an accepted first offer on a property.”  While that definition is all fine and dandy, it doesn’t quite explain the entire picture in terms the average buyer on the street can understand.  But don’t worry, we will.

As the seller of a property, when you have multiple bids or interested parties, you often have to make a judgement call on which to select.  Generally, it will be the highest priced bid.  But what happens when, as in our TN scenario, the deal falls through because the buyer couldn’t obtain financing, the house didn’t appraise or the buyer simply got cold feet?

If at the outset of the process you accepted one of the bidders as your buyer, but let your second best choice know that you would hold their offer as the back-up in case buyer one fell through, then you would have a back-up offer in hand.  The sale of the home could then continue with only a slight delay, with the new buyers already lined up.  If you didn’t start out with multiple bids, you could also instruct your realtor to note in the listing details for the home that back-up offers are being accepted.

Back-Up Offers Are Great for Buyers Too

Sellers aren’t the only ones that can benefit from having a back-up offer handy.  The back-up buyer certainly has one glaring advantage: they get the house they wanted if the original sale falls through.  And fall through it may.  There are numerous reasons the initial buyer may not be able to make it all the way to the finish line on purchasing a home.  But if you have a back-up offer on the property, their loss is your gain.

The Downsides to Having a Back-Up Offer

Now I know what you’re thinking.  “Wait, they just told me having a back-up offer on a home I want to buy is a good thing.  How can getting the home we really wanted have any downside.”  Like all great opportunities, there is some risk and a few negative implications to holding an accepted back-up offer on the house of your dreams.

First, a back-up offer is a legally binding contract.  If the initial buyer falls through, you will now be on the hook to purchase the home, or risk losing your earnest money if you decide to withdraw.  Yes, we said losing your earnest money because, like a traditional offer, you will be submitting a portion of the down payment with your back-up offer to be held in escrow until the first buyer closes or your back-up becomes an offer in the case the first sale falls through.  Also, in the event that your back-up does become the active offer, it will be accepted as written.  This means there is no renegotiation, adjustment of price or other alterations after the fact.

The Nitty Gritty

When it comes right down to it, everyone likes having options.  “When one door closes, another opens” wouldn’t be printed on all the truck stop kitsch if there wasn’t some serious truth to the statement.  A back-up offer can benefit a seller by making sure there is an alternative plan in place in case the sale falls through with the initial bidder.  For the buyer, in a hot real estate market, or when you’ve found the home of your dreams, you can still potentially get into a home, even though yours wasn’t the initial accepted offer.  If you’re debating making a back-up offer on a home, or want to know more about whether you should accept them in your contemplated sale, consider speaking with a qualified real estate agent in your area.  The back-up offer process can be just as complicated as the traditional offer to buy a house, and it will pay to have someone in the know on your side.



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