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*
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.