Back-Up Contract. An “Aha” Moment. For Buyers, & Sellers Too!

What is a back up offer on a home for sale?

A “Back-Up Offer” is an offer that is submitted when a home is already Under Contract (as seen on FranklyMLS with the strikeout line) with another buyer. (sidenote: this post kinda conflicts with my “this home is not available” post on the FranklyMLS blog, feel free to call me out on it).

If the seller signs it, it becomes the “Back-Up Contract.”

Does it happen often?

Sure. My guess is 10-20% of deals. Especially in the first week of being UC. I once had a listing with 4 contracts that fell out!

How does one put in a back up offer?

The second potential buyer will submit, preferably with their buyer’s agent (which should be an exclusive agent), a regular 20+ official contract with an addendum that outlines the details of the “back up offer.” This offer becomes ratified when it is signed by both parties. Then, in the event that the first contract does not perform, then the back-up offer immediately becomes the “primary contract”.

Why do 10-20% of contracts fallthrough?

1) The appraisal! If the property does not appraise for the contract price, then both sides have another round of negotiations. Some buyers (silly) freak out with low appraisals and demand a 100% adjustment, ie price drop. Some sellers say “you wanted to pay X, we aren’t dropping because somebody disagrees with our free-market agreement.” The deal is then dead.

2) The Home Inspection. Either too much was wrong with the house, or the buyer wanted too much in repairs or concessions. The seller told them no, and the buyer walks.

3) Finance Contingencies. The lenders says “Oops, I thought you could qualify, but that new car you bought blew up the numbers.”

4) CONDO/HOA Doc. This is a big one. Buyer’s remorse or the buyer finds out the place doesn’t allow 2 dogs, etc etc. The buyer can walk, or void the contract, after 3 days (different for new construction) for no stated reason.

5) Add more in the comments, I bet we can find 20 reasons

Noteworthy buyer concepts (simplified of course):

1) The SHORT SALE Quasi-KICKOUT!

I might have to remove this because it is just too good. A back up offer on a Short Sale can be perfect surprise. Why? Because the home goes under contract when the seller signs. But nothing really matters until the BANK signs! So if you offer before the bank approves it, and if the listing agent submits it (sometimes they won’t, and for good reasons) to the bank, the bank might just say no to the main offer and take your “back-up.”  You can also do this after the first buyer has waited 3 months for approval. Swoop in at the last second and snag it. Unethical? Heck no, this is business.

If that doesn’t give you a “Geez, maybe just maybe, no matter how smart I am, or what I got on my SATs, maybe somebody in the field of real estate, with experience, might be able to add some value to my home search.”

2)  A bonus incentive for the seller. A back up contract/offer can be higher than the current contract.  If the buyer really wants a place, they can offer $5k or much more than the primary offer (there are ways to try and find out what that offer is). Why would they do this? Why not just make it the same amount? Well if you offer $30,000 more (or better terms), and the first buyer is playing games and asking for concessions, the back up offer suddenly appears much more appealing. If the offer is the same amount, the seller might just figure “well we would have this problem with the next buyer anyhow and we would lose another 2 weeks, so lets just proceed”

3) The back up can be lower or the same price. In this instance you would be relying only on the buyer changing their mind and less on the seller having an incentive to switch to yours.

4) Most buyer agents don’t like doing them because they think it is a waste of time. However one of our agents bought their dream home as a back up offer. So do what the agents do! I just submitted a back up yesterday.

SELLERS LISTEN UP TOO!

Don’t think this is just for buyers.

Is your listing agent soliciting back up offers? No? (see Sucky Listing Agents ’07 post) They should be!

I would say 90% of Listing Agents do not bother. Easier to sit back and wait for a problem, even if that results in your client taking a $10k hit. (there is no monetary motivation to work twice as hard to make a couple hundred bucks more in commission).

If you decide to interview listing agents (some people recommend this, I don’t, I think you should just hire us, too much BS out there that you might believe), ask how many back up offers they got on their last 10 listings, or if they asked for them. Or look at their remarks on Under Contract homes. Do they ask for back up offers? Most of our listings have that (there are some reasons not to). Again, goes with the motto Excellence Comes Standard TM (I was gonna call is the “Duh, Of Course We Do That” service, but it was taken).

In conclusion, a back up offer is perfect for that really picky buyer that just MUST have that one particular house they just had to have.

Written by Frank B. LLosa Esq*

Broker FranklyRealty.com

Stop thinking I am too busy for you! Try me, I’ll reply in minutes.

p.s. Blatant ad coming up… But there can also be draw backs for back up buyers that can make you worse off than just waiting for the primary to fall out. But I’ll have to keep that for current clients and hide that from the competition. I can’t tell everyone everything. Also there are not enough people visiting this site to put food on the table selling banner ads, so I guess a select few of you that see value in this can contact me to help you buy a home, and you get all of this info and the secret stuff.

*NJ only

Photo credit: Truck image, Lens image, cash

  • 25
  • October
  • 2012

35 Responses to “Back-Up Contract. An “Aha” Moment. For Buyers, & Sellers Too!”

  1. Love this specific blog post! Just got an awesome back-up (way above list price and waiving part of the appraisal) for one my listings – Sellers are super happy. So true that every agent should do this to plan for the unknowns.

    You bring up good points for buyers to think about…do they want to submit a back-up that the Seller would want to avoid OR a back-up offer the Seller would try to cancel with Buyer#1 so Buyer#2′s back-up could become primary.

    It was ME that purchased my dream house as a back-up contract, so clearly I know it can happen.

  2. Vicki Lloyd says:

    Add to Reasons contracts fall out :

    Your buyer was someone else’s backup buyer, and they just got the call that their favorite home is available to them after all!

    Your buyer & his lender thought he was qualified to do a 95% loan, but just learned that he needs to do FHA and your condo is not on the FHA approved list.

    Your buyer is being transferred from out of the area, and wife just accepted new job and needs to buy a car to get to it. Lender won’t let them buy car until after loan is funded!

    I just experienced each of these reasons to blow out my sale on the same condo! We are now on buyer #4 (all cash & 20 day close) and crossing fingers that it sticks this time!!!

    I did have backup buyers in my file, so I just called the next in line each time. Fortunately, the market is hot and inventory is very limited, so it never had to really go back on the market.

  3. FranklyRealty.com says:

    Thanks for adding that Vicki. Just curious, did you try and get ratified back up offers? Or did you wait for the buyer to fall out and contact the other parties one by one? Any disadvantage to having a ratified back up that I might be missing?

  4. Rick Belben says:

    Another great post as always. Glad to see you have been writing them nore fequently

  5. Great post, Frank!

    I’m not a Realtor, so please forgive if this is an elementary question:

    What happens when the back-up offer is significantly more attractive than the initial offer that’s first been accepted, and the seller wants out of the first contract? How can the seller wiggle out? My only idea is that he could refuse all requests on the inspection and hope the first buyer opts out. Any other strategies?

    Now I’ll click on one of your banner ads to help support the site.

  6. FranklyRealty.com says:

    Great question.
    Not sure what banner ads you are referring to. We don’t have any.

    As per your question, the seller can’t get out easily. But yes, they can refuse certain fixes, appraisal reductions etc.

    Thanks. Frank

  7. Vicki Lloyd says:

    Hi Frank –

    We did not have ratified contracts from the backups. The way I see it, is that it could obligate the seller, but the buyer would still be free to go buy another.

    Our market is so hot, the prices can go up in a week, so I didn’t recommend committing to last week’s sale price if the deal fell apart. As it turns out, all four contracts were for the full list price, and I have been a little concerned about getting it to appraise! Don’t have to worry about that with our current cash offer. (Still have fingers crossed that it really will close this time!)

  8. FranklyRealty.com says:

    Our contracts frequently go over list. The key then becomes having the buyer waive part of the appraisal. As for prices going up, the risk is if you have only 2 of the 10 offers coming in at 5% over list, if the first one drops out, the second one might want to renegotiate. If you have them as a ratified back up offer, they would become the primary offer and be obligated to the new price. They can only walk up until the moment they become the prime. At least in this area.

  9. Joe White says:

    This is intersting and seems even more valuable for real estate investors. Its a great way to secure a percentage of the great deals available.

  10. Susan says:

    So many agents are unwilling to take a back-up offer, but I agree they are invaluable and if you are truly working for the best interest of your sellers, you should always take one!

  11. george says:

    If you have a better back up contract which is ratified and want to get rid of the first buyer. How can you do that?

  12. FranklyRealty.com says:

    Great question George. It is ten times harder for the seller to get out. One thing you can do is contact a real
    Estate lawyer to look for flaws in the contract. Then you can reject fixing home inspection items, also you can try and be strict on all contingency deadlines. Good luck

  13. Nancy says:

    Does the The SHORT SALE Quasi-KICKOUT work only in New Jersey or would it be legal in any state? I am in California and was told by the listing agent that the bank requested from them only one offer at a time and therefore would not submit my backup offer, which makes me think what are my chances really??? I do know that the seller already approved a buyer but that the bank still did not. Please advise!!!

    Many Thanks,
    ~Nancy

  14. John says:

    What about this which I came across on the interent:

    The problem with backup offers in a competitive buyer situation is that the backup offer actually increases the chances that Buyer 1 will close on the home. Buyer 2 may feel better that they’re doing something constructive by signing a backup offer, but they’re really giving more incentive for Buyer 1 to expedite the sale.

    Buyer 1 has plenty of potential reasons to back out of the contract. They may find something they don’t like about the neighborhood. An inspection could reveal structural issues. A new home just down the street that Buyer 1 likes better might come on the market just a few days later.

    When there are multiple backup offers in place, though, Buyer 1 takes on a protective stance. They know that others want what they have, and they are more likely to forgive inspection issues and be more cooperative in seller negotiations. If Buyer 2?s offer is at a higher price than Buyer 1?s, it creates even more of a sense to Buyer 1 that they’re getting a great deal.

    Buyers submit backup offers in competitive situations. Negotiations require buyers to gain any competitive advantage possible. By submitting a backup offer, buyers often pigeonhole themselves into a subordinate position, and motivate their competition.

    This doesn’t mean that buyers can’t do anything. Have your Realtor let the listing agent know that you’re waiting in the wings with your buyer if anything goes wrong. Stay on top of the transaction as it moves along, and if for any reason the sale fails, have your offer submitted immediately.

    A buyer can still scoop up a failed sale in one day if their Realtor is on the ball and ready to submit the offer. By being prepared, but not motivating the competition, home buyers put themselves in the strongest position possible.

  15. FranklyRealty.com says:

    Hey John, thanks for the back and forth offline. I should copy and paste it all here.
    For others, to sum it up, I understand that a back up offer can strengthen the main offer…. heck we do that when we list a place, we use the back up to make sure the main doesn’t mess up. But MOST agents dont do this. And back ups have worked too many times for us to not recommend it. If you are merely in the “let me know if something falls out” and then the seller is in a position to end the contract, they will be 5x more likely to jump to your contract then to cancel first and then start a new round of negotiations.

  16. FranklyRealty.com says:

    Our brokerage firm is in DC, VA, MD. It is not about being legal, it is more about what the bank accepts. Some banks only want to see one offer at a time, some banks want the seller to confirm that they have seen everything. In your situation, the benefit of the back up would be when the bank comes back asking for a higher price. Then the agent might submit yours. So you might even make the offer $5-20k higher then the current offer.
    Also the main offer drops out ALL the time when they are sick of waiting. If you are a back up, you can easily step in…

  17. FranklyRealty.com says:

    This is case specific. But it is much harder for the seller to back out. But for one they can not agree to any home inspection repairs.

  18. hunter123 says:

    I asked to do a back up and my realtor says that there are under contract with no kick outs so there is no reason to put in a back up offer. I disagree. I haven’t seen the house but I would like to see it. I looked at a similar house with the same floorplan. I plan to ask again. I am thinking of even calling the listing agent.

  19. FranklyRealty.com says:

    Don’t call the listing agent. Call me.

  20. William says:

    I’m wanting to submit a back-up offer on a small 1 bedroom condo in SE Florida. However, how would I know the amount of the first offer in order to figure out what my offer should be?

  21. Barb says:

    From the buyers point of view. Let’s say I spot a house I REALLY like, but it’s under contract. I talk my agent into submitting a backup contract. Time goes by and I come across another dream home.

    Can I rescind my back up offer on the first dream home?

    At what point can/should that be done?

    Also, if a house has been “Under Contract” for a long time (over 3 months), does that make it a better candidate for a backup offer?

  22. FranklyRealty.com says:

    Good question.
    If you have an agent, you need to ask them.
    Assuming you don’t… You can usually (read the offer) rescind at any time before it becomes the main offer. If you don’t want to rescind it (like if you are back up 1 of 3 back ups, you will lose your place) you can make your new offer contingent on release of the other back up.

    As for when to do a back up, that is hard to say. One hot period is the first 7 days with home inspection. Then around 21 days is the appraisal. That is a big one. If the appraisal is $20k short and the buyer wants the seller to come down, but you have an offer that waives appraisal… they might move over to your offer. And then the next point is toward the end if something falls apart. Those are the main three times a deal will crumble. A deal UC for 3 months, sounds like a short sale, and more reason to do a back up on those.

  23. Barb says:

    Thanks Frank,

    No agent yet… And still just window shopping. Once we sell our investment house, we will probably be a good “backup” because we would be a cash buyer.

    Now…. what if it’s a bank/Fannie Mae/Freddie Mac owned home? Do you know if they will take backups? I have seen foreclosure’s go under and off contract numerous times.

  24. Michelle says:

    Please help me get the home of my dreams. A contract was just accepted after being on the market over a year but I am willing to submit a higher offer as a backup. I live in Louisville, KY.

  25. ray says:

    Hello,I put an offer in on a Townhouse three days ago and still haven’t heard anything from my Agent except the apparent Seller is not reachable. My Agent said, “She might be traveling.” I don’t understand why she is playing this type of game. I don’t believe that the “Seller” would just not answer my offer and not respond to my Realtor who is the listing agent. This is a all cash offer close to asking and the sale is “As Is.” Can you give me any feedback on this situation. Thank you.

  26. FranklyRealty.com says:

    I am confused. You said “my agent” several times but then you said your agent is the listing agent. The listing agent represents the seller.

    Unless you took the Dual Agency route.

    If so, THAT may be the problem.

    Who is the agent looking after? The buyer? The seller?

  27. Jenn says:

    We missed out on being the first offer for our dream home by 3 days and was told that the seller had accepted the other people’s offer. It’s been a couple weeks now and two days ago the seller’s agent called our agent saying that the contract was looking like it could fail and if we were still interested they would accept a backup offer and we put one in. I was wondering just how likely it will be that the original contract will actually go ahead and fail. We hate to get our hopes up to only be crushed again, but it seemed that if the seller’s agent was taking the time to track us down that the chances were really good. We are first time home buyers and new to the game and are definitely overwhelmed.

  28. AJ says:

    FranklyRealty.

    I wish I had seen this article a month ago. I emailed my agent a list of homes on a Tuesday to tour Saturday. I get to her office Saturday and she tells me the top 2 on my list just had an offer accepted the day before (on Friday) and leaves it at that. She then proceeds to take a convenient detour from my list of homes to one of hers that’s close by but way over our price range and actually smells terrible because it hadn’t had a professional cleaning yet.

    2 weeks later, I see another house that fits our extremely narrow standards AND is priced $30,000 below value because the seller got another job in the next state and just wants to be done with the house (I suspect divorce or something, but who knows). He gets an offer on Thursday and accepts it. Knowing my previous agent, who has diligently shown me 15-20 homes over a couple months, will likely tell me it’s under contract, I called the seller’s listing agent thinking she’s more motivated since she won’t have to split the commission.

    Boy, were we right. She advises a backup offer, which is unusual in this market, and even mentions that she’s hesitant it could “burn bridges” in this market. I’m assuming she meant with the primary buyer’s agents. But like you said, business is business.

    The seller accepted our backup offer (priced above theirs, and with no demands like asking the seller to pay all closing costs), but here’s the twist: our (dual) agent does not tell the primary buyers that we exist. And boy, are they being bold. I’m so glad we submitted a backup offer because their agent just sent over a contract for the seller to commit to them even if the home doesn’t close in 30 days. It’s pretty standard for it take longer than that, but our dual agent is stalling as long as she can before letting them know he won’t sign it. It’ll come as a surprise because hopefully, by the time their bank demands it, they’ll be too far gone and unable to close in less than 2 weeks. Meanwhile, we’re proceeding as if we are the primary buyers and lining up our bank so we can close as soon as humanly possible.

    It makes me feel terrible, because I’m basically wishing the primary buyers fall through due to unforeseen bad luck, but this is seriously the home of our dreams. And our market is so competitive due to never seeing unemployment dip below 3% in our state for the last decade. I’m really impressed with our agent silently keeping us in the wings, in constant contact with us and the seller and doing everything she can to embolden the buyers into eliminating themselves.

  29. FranklyRealty.com says:

    AJ, it really sucks that your buyer agent didn’t push for a back up offer.
    But what about them? Did you not have a contract with them? Is it ok to have them show you 15-20 homes and then cut them out?
    I am adamantly against dual agency as well. With Dual Agency they can’t represent you or the seller, and just the contract.

  30. Tim says:

    A story – we are backup on our dream house to a local developer who wants to flag lot an amazing 1/2 acre. We cold called developers trying to find who had this property. We found them. We are meeting with them today and have a contract with them to pay them to go away. We have a signed backup offer with the sellers, which will kick in. While most would say ‘just wait’ that is not what we did. It’s costing us a bit, but we want this home so badly, we are willing to pay the developer to go away. We’ve ran this by lawyers, other agents (our agent is out of the loop on this – he said he couldn’t advise us and didn’t want to know what we were up to), and other folks – it seems like we will have the home – but of course I’m leery of any glitches that could come up – particularly since we are spending a lot of money to have the developers walk. Thoughts?

  31. FranklyRealty.com says:

    Hire a lawyer.

  32. Heather says:

    Backed out of buying a house after it was found to be in the flood plain. Flood insurance added an extra $120 each month to mortgage.

  33. Jessie says:

    Can you give me suggestions on how my real estate agent might be able to find out the accepted offer? We were outbid, but would like to put in a back-up offer. Thanks for your advice!

  34. AJ2 says:

    Hello,

    You mention this above…

    “2) A bonus incentive for the seller. A back up contract/offer can be higher than the current contract. If the buyer really wants a place, they can offer $5k or much more than the primary offer (there are ways to try and find out what that offer is).”

    Do you have any suggestions on how you can actually go about finding out what the current offer is?

    Thanks,AJ2

  35. FranklyRealty.com says:

    1) You can ask.
    2) You can use an escalation clause. Almost never done with back ups, but why not. An escalation will weed out the other amount. Since you say you will pay $5k over what the other offer is, with a max of xyz.

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