Backup Offers and if You Should Write One in a Hot Real Estate Market

By in Prescott AZ with 0 Comments

In case you haven’t noticed, our real estate market here in Prescott right now is piping hot!

Inventory is still extremely low, which means that as soon as a decent home comes on the market, it seems to go almost instantly.

In a market like this, you might end up loosing out on a home to another buyer with a better offer. This happens ALL THE TIME. However, if you are REALLY in love with the home, your agent might bring up the possibility of writing a backup offer. Unless you are familiar with how real estate contracts work, this notion might be a new one to you.

Check out this article from houseopedia.com that explains all about backup contracts, the pros and cons, and if it’s something you want to consider when you find yourself missing out on house after house.

When Should You Make a Backup Offer?

If you’ve been shopping for a new home in a hot seller’s market, you may know the frustration of having the home you want snapped up by another buyer. You may be able to buy the house anyway by making a backup offer, but there are pros and cons to consider. Read on to decide whether a backup offer is the right move for you.

How a backup offer works

In many states, home sales contracts can contain clauses allowing a seller who has accepted a buyer’s offer to accept a backup offer from a secondary buyer. In the event the sale to the first buyer falls through, the backup offer becomes an executed contract between the seller and the second buyer transferring the home at the price designated in the backup offer.

Benefits and risks of back up contracts

For the seller, a backup contract means he has a buyer already waiting in the wings. He can move seamlessly to the next sale if the current one fails instead of having to put the house back on the market.

For the secondary buyer, an obvious benefit of the backup offer is that it puts you in line for the house you love. The original buyer may still end up closing the deal, but if he doesn’t, the home is yours. A backup offer also means that if the first buyer drops out, there won’t be a bidding war on the house.

But these benefits are intertwined with risks. The very occurrences that can cause the primary buyer to back out of his contract may make the home less attractive to the secondary buyer. For example, the primary buyer’s inspection may reveal past damage or the need for a significant repair. If the first buyer and seller can’t agree on repairs or a price concession and the contract dissolves, your backup offer means you’re contractually obligated to buy a house on which a price concession may be in order. You will find yourself immediately negotiating because your deal isn’t as attractive as when you first made it. The same situation could occur if the first buyer’s mortgage appraisal comes in too low. Unless the seller lowers the price or the first buyer makes a larger down payment, their deal will fall through, leaving you having offered too much based on the appraisal.

Secondary buyers may also find that even if the primary buyer has reasons to want out of his contract, the very presence of the secondary buyer may actually make the primary more protective of his deal. This will lessen your chances as a secondary buyer of getting the house.

Should you place multiple backup offers?

If you’ve found the perfect neighborhood during a seller’s market, you might be tempted to put a backup offer on more than one house in it. It’s best to think that gamble through carefully, however. If more than one of the primary contracts falls through, you could be contractually committed to more than one house.

Alternatives to a backup offer

If you decide a backup offer is too risky, that doesn’t mean there’s nothing you can do to get the house you love. Prepare an offer with your agent to have ready and waiting. Your agent can let the sellers of your dream home know that you would love to buy it if the first contract falls through. By monitoring the transaction closely, your agent can step forward immediately with the prepared offer if the first buyer decides not to purchase the home.

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