What is a backup offer?
When a seller has already accepted an offer from another buyer, they should still be willing to hedge their bets and accept backup offers. Basically, a backup offer puts a buyer in the position of being first in line for a property if the accepted or primary offer fails for any reason (inspections, appraisal, financing, etc) and provides the seller a fall back contract.
Writing or accepting a back-up offer works just like any other offer to purchase, with the negotiations on price and terms happening before there is an accepted contract. The exception is that there is an additional contingency for non-performance of the first offer. In English, that means that if the first buyer can’t perform the back-up buyer’s contract becomes the primary offer and how that happens is detailed in the purchase agreement.
Hints for Home Buyers
We always recommend that inspection periods do not start until a back-up offer becomes primary, because there is no reason to spend money inspecting a home that you may not ever get a chance to purchase. Loan approval dates and closing dates are usually based on the date that an offer is accepted. In the case of a back-up offer, those dates would be based on when the offer becomes the primary one. For example: Inspections would be performed within x days of the offer becoming primary rather than within x days of acceptance of the offer.
It’s important to have an experienced agent on your side when writing a back-up offer, to be sure that all of the possible contingencies have been covered…this is usually not a do-it-yourself type of transaction. If your mortgage interest rate lock will expire before the estimated closing date of the primary offer, you may want to consult with your mortgage lender to find out if a rate lock extension will be available to you. Additionally, an experienced buyer agent will ensure that you have the ability to cancel the contract at any time prior to becoming the primary offer. You don’t want to be stuck in a back-up position with no way out until the original offer closes.
Hints for Home Sellers
Don’t give away your confidential information during the negotiation of a back-up offer! Telling a potential buyer “well, the other people offered us $xx” is never a good idea since you have no idea what the back-up buyer may be willing to pay and you could be short changing yourself.
Don’t let having a back-up offer in your pocket keep you from being fair and open minded during the inspection response negotiations. It’s a real risk to turn away a buyer based on their repair requests when you have no idea if the next buyer will ask for even more.
Do you need to know more about backup offers? Call us at 504-327-5303 and we will be happy to chat with you and answer any questions you might have.