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Is a Backup Offer a Good Home Buying Strategy?

A Guide to Investment Property Loans

So, you spent months searching for the perfect home and just when you found it, another interested buyer made an offer! Now the offer has been accepted and your, yes “your,” dream home is already under contract. Now what? Should you resume your search or try something else?

A tactic that is not often discussed is the practice of submitting what’s known as a “backup offer.” A backup offer is a legally binding contract in which an interested buyer offers to purchase the home at a certain price, under certain terms, if the primary offer falls through. Both the seller and the party submitting the backup offer must sign the backup offer to purchase contract.

Why submit a backup offer?

Submitting a backup offer can often work out in your favor. That’s due to the fact that for a variety of reasons, real estate deals can sometimes fall through. Issues with financing, glitchy home inspections, employment, school preferences, misunderstandings and family situations are some of the most common reasons that cause buyers and sellers to bail on a contract. If the primary contract doesn’t work out, a buyer who has already submitted a backup offer stands an excellent chance of getting the property.

Why do sellers accept backup offers?

Sellers often advertise that they are considering backup offers to try to motivate the primary buyers. If the primary buyers know there is a good backup offer on the table, they may be less likely to make a lot of demands and may move quicker through the process to secure their deal.

What you should know before you submit a backup offer:

When considering the idea of making a backup offer there are several points to keep in mind:

  • Before submitting such an offer, discuss this strategy with your real estate agent and enlist the help of an attorney to protect yourself.
  • Since you may be unable to renegotiate the offer’s terms, make sure to include contingencies that keep your best interests in check.
  • Your backup offer will not become active until the primary offer from another prospective buyer falls through. Consider including a contingency that allows you to walk away from the backup offer should you find another property you’re interested in. That way, you can keep moving forward without wasting time, in case the primary offer works out.
  • When the first offer fails, an existing backup offer that has been accepted by the seller will become active, even if the home does not go back on the market.
  • Be aware that a backup offer requires an earnest money deposit.
  • Just like an initial offer, once both the seller and the buyer have accepted and signed it, a backup offer is a legally binding contract.
  • There are several opinions on backup offers. Some think that when the first buyer gets wind of a competing offer, they become afraid of the competition and hurry to close the deal. Others speculate that it encourages the first buyer to wiggle out of the deal at the first sign of trouble and then leave the backup offer holder “holding the bag.” That’s why, anyone who has submitted such an offer that is then accepted should find out what went wrong with the primary offer.
  • Yes, there can be multiple backup offers but it’s pretty rare. In the event where there are multiple backup offers on the table, the order in which the contracts were signed determines the order in which the interested parties are entitled to buy the home. Therefore, if you’re submitting a backup offer after one or two backup offers are already in place, it would be in your best interest to make it a very enticing offer. This will hopefully prevent the sellers from putting the home back on the market if the first few sales failed.
  • When it comes to short sales, submitting a backup offer can greatly increase your odds of getting the property under contract. That is due to the fact that any little hiccup along the way can delay a short sale. It’s not guaranteed, but it isn’t uncommon for the primary buyer in a short sale to back out once they realize just how long they’ll have to wait. (Short sale transactions, contrary to their names, often take months to go through).

To summarize, backup offers aren’t a requirement and may not be a logical choice for everyone. However, if there is a particular property you are absolutely head over heels for, submitting a backup offer could be a great way to increase your chances of owning the home of your dreams. For those who seriously have their heart set on a particular home, a backup offer can help you get a foot in the door before the sellers relist. For more information on submitting backup offers, talk to your real estate agent.

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