Imagine you've found your perfect home. It has everything you want, and it's within your price range. There's one problem, though: Your agent says the seller will only accept a backup offer.
So should you write a backup offer? The situation isn't ideal, but it might not be as bad as it seems at first. Sellers don't usually ask for backup offers unless they feel like there's a good chance the offer in hand might not pan out. By securing your second spot in line, you might very well end up buying that home.
If you're wondering whether or not to write a backup offer, here are some important considerations to keep in mind.
- A backup offer acknowledges the existence of the first offer and says that if the first buyer cancels, you are automatically in contract with the seller.
- Sellers can sign more than one backup offer, as long as they make the situation clear to everyone involved.
- Whether your backup offer needs to be higher than the asking price depends on how many offers the seller receives.
- If you are buying a home that is subject to short sale approval, the odds of a backup offer getting a chance to purchase the home may increase.
What Is a Backup Offer?
If you've never written a backup offer, you might be wondering what exactly it is. A backup offer is written when a seller already has a potential buyer lined up. If the first offer falls through, then the backup offer will come into play.
The first offer could take many forms, including a contingent contract that would only close under a specific set of circumstances. For example, the contract could be:
- Contingent on the buyer selling an existing home.
- Contingent upon inspections, which include a satisfactory home inspection.
- Contingent upon the home appraising for the sales price (and a low appraisal is a possibility).
- Contingent upon the buyer obtaining favorable financing (and anything can happen in underwriting).
If the transaction hits a snag on any of the contingency points, the whole deal might get canceled. Without a backup offer, the seller would need to put the home back on the market and start showing the home again. A backup offer acknowledges the existence of an existing offer and says, if the first buyer cancels, then you are automatically in contract with the seller.
A backup offer also protects the potential buyer by preventing the seller from entertaining other offers or putting the home back on the market. If you've written a backup offer, and the first buyer cancels, then your contract automatically comes into play.
If prices have gone up since you wrote the backup offer because you're buying in a rising market, you've locked in the price from your original offer.
A backup offer needs to be signed by all parties for the contract to be effective. Sellers can sign more than one backup offer, as long as the seller makes the situation clear to everyone involved. For example, you could be in the fourth position if there are four backup offers. Ideally, you want to be in the first position, because this is the offer that's next in line.
By placing yourself in a backup position, you are not obligated to buy the home, and you can still look at other homes on the market while you wait. If you find another home you like better, you might be able to withdraw your offer from consideration. However, that practice is frowned upon—it essentially negates the purpose of a backup offer.
Do Backup Offers Have to Be Higher Than the List Price?
Whether your backup offer needs to be higher than the asking price depends on how many offers the seller receives. In a multiple offer situation, you can be fairly certain there will be offers for more than list price.
Here is an example of how a multiple offers situation could go:
- The first offer is less than the list price because the buyer doesn't know anyone else is interested.
- The second offer is the list price. The first and second often arrive close together, but the second offer will commonly increase the amount.
- The third offer is slightly more than the list price because the buyer really wants the home.
- With the fourth offer, the price pattern begins to break down. Whether it's the fourth offer or the ninth, these buyers know it's a long shot that their offer will work its way up to the first position, so the price isn't as critical.
The seller has an incentive to stick with the first buyer's offer, especially if it's a higher offer. However, by submitting a backup offer, you are saving the seller time and trouble, so the seller might be willing to accept a little bit less to give you an incentive to wait. On the other hand, if multiple offers are the norm in your neighborhood, it's generally a good idea to match the offer on the table.
When deciding on a price to offer, it's best to consult an agent who knows the local market, rather than depending on your own intuition.
Backup Offers and Short Sales
If you are buying a home that is subject to short sale approval, the odds of a backup offer getting a chance to purchase the home may increase. Many buyers don't want to wait for short sale approval, and any little snag along the way can further delay a short sale. Unless the first buyer desperately wants the home, there is a chance they will not wait for the process to play out.
Another aspect to consider is that the short sale seller and the buyer might have signed a short sale addendum. If that short sale addendum allows the seller to accept backup offers and send those offers to the bank, you might be in a position to persuade the seller to submit your offer to the bank. If you can make a better offer than the first buyer, you can effectively jump in front of them in line.
This is a situational strategy, though, so talk to your agent to see whether it's an option for you.