Backup Offer

Definition

A backup offer in real estate is an offer made by a prospective buyer to purchase a property if the current buyer's contract falls through. This type of offer ensures that the seller has an alternative buyer ready to step in if the primary transaction does not close as planned. The backup offer is typically accepted and held in a secondary position, contingent upon the failure of the initial contract.

Purpose

The primary purpose of a backup offer is to provide a safety net for both the seller and the potential buyer. For sellers, it minimizes the downtime between transactions if the first deal collapses, ensuring a quicker transition to a new buyer. For potential buyers, a backup offer secures their position in line for a property they are interested in, without having to actively compete with other buyers once the primary deal is off the table.

How It Works

When a seller receives a backup offer, it is typically negotiated and signed just like a primary offer, but it includes a contingency clause stating that it will only become active if the current contract is terminated. The seller is not obligated to notify the backup buyer of every step in the primary transaction, but they must inform them if the primary deal fails. At that point, the backup offer automatically becomes the primary offer, and the backup buyer is now in the position to proceed with the purchase.

When to Make a Backup Offer

A backup offer is most strategic in competitive markets where properties receive multiple offers quickly. It is also advantageous if the primary offer seems uncertain, such as when the buyer has financing issues or there are unresolved contingencies. Buyers who have a strong interest in a particular property and who are willing to wait for the primary deal to fall through should consider making a backup offer.

Legal Considerations

Legally, a backup offer must be clearly documented with all terms and conditions outlined, including the contingency that it only becomes effective if the primary contract is canceled. It's important for buyers to understand that they are legally bound to proceed with the purchase if their backup offer is activated. Buyers should also be aware of any deadlines or conditions that might affect their ability to close the deal once it becomes active.

Advantages

For sellers, the main advantage of a backup offer is the reduced risk of having to relist the property, which can save time and money. For buyers, a backup offer provides a chance to secure a property without engaging in a bidding war, as they are next in line should the primary offer fail.

Disadvantages

One disadvantage for buyers making a backup offer is the potential for their funds or plans to be tied up, as they wait for the primary offer to fail. This could mean missing out on other properties that become available during this waiting period. Sellers might find that backup offers are less competitive in terms of price or terms, as buyers know they are not the first choice.

Examples

Consider a scenario where a home is listed in a hot market and receives an offer quickly. The seller accepts the offer, but the buyer is having difficulty securing financing. Another interested buyer submits a backup offer, which the seller accepts. When the first buyer's financing falls through, the backup offer is activated, allowing the second buyer to proceed with the purchase without the property going back on the market.

Key Terms

• Contingency: A condition that must be met for a real estate contract to become binding.
• Primary Offer: The first accepted offer on a property, which takes precedence over any other offers.
• Active Offer: An offer that is currently in effect and moving towards closing.
• Secondary Position: The status of a backup offer, indicating it is contingent upon the failure of the primary offer.

Frequently Asked Questions

1. Can a seller accept multiple backup offers?

   Yes, a seller can accept multiple backup offers, but each should be clearly ranked in order of priority.

2. Do backup offers require earnest money?

   Yes, backup offers typically require earnest money, which is held in escrow and only applied if the backup offer becomes active.

3. Can a buyer withdraw a backup offer?

   Yes, a buyer can withdraw a backup offer before it becomes active, but they should review any contractual obligations before doing so.

4. How often do backup offers become primary?

   The likelihood varies depending on the market and the conditions of the primary offer, but in competitive markets, backup offers frequently become primary due to the high rate of contract failures.