What is a Backup Offer?
Let's start by looking at what makes your offer a backup offer. First, the seller has already accepted another offer. That first offer is probably a contingent contract, which depends upon a certain number of events that may or may not happen to close. Some of those contingencies might 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 any one of those situations hit a snag, the transaction might cancel. If the transaction cancels, then 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 needs to be signed by all parties to the contract to be effective. Sellers can sign more than one backup offer providing the seller makes the position of each party known. For example, you could be in #3 or #4 position if there are four backup offers. Ideally, you want to be in #2 position.
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. This is how many multiple offers go:
- First offer: less than list price, because the buyer doesn't know anyone else is interested.
- Second offer: List price, because often the first and second arrive close together.
- Third offer: Slightly more than list price, because the buyer really wants the home
- Fourth offer to 10th offer: Somewhere in between because these buyers know it's a long shot.
The seller has an incentive to stick with the first buyer's offer, especially if it's a higher offer. But you are saving the seller time and trouble by submitting a backup offer, so the seller might be willing to accept a little bit less to give you an incentive to wait. But if multiple offers are the norm, it's generally best to match the offer on the table.
Backup Offers and Short Sales
Should you are buying in area that has a number of short sales on the market, a backup offer probably gives you odds greater than 50 / 50 that the first offer will go away. Many buyers don't want to wait for short sale approval, and any little snafu along the way can delay a short sale. The odds are very high the first buyer will not wait.
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 can withdraw your offer from consideration.
However, another avenue to consider is the short sale seller and 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 a in a position to persuade the seller to submit your offer to the bank. If it's better than the first offer, which offer do you think the short sale bank will accept?
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.