Making a Backup Offer on a Home: A Good or Bad Idea?

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Given the recent scarcity of homes available for sale to the buying public, there has been a sharp increase across the country in home buyer competition.  Low real estate inventory has been driving more multiple-offer situations and bidding wars on homes than we’ve seen in many years.

The Seattle area is a prime example, with 60 percent of real estate listings near the major job centers being sold in under 30 days.  There are just 1.39 months of housing inventory available, when 6 months is the standard for a healthy, balanced market.

For so many buyers, when they find their dream home today, the seller has just signed a contract with a different buyer.  Whether it’s the first home that the buyer has missed out on or the third, there can be a desperate feeling that says “This home is perfect for me, what can I do to save it?”

Backup Offers

One potential tactic that is becoming more popular is submitting a backup offer.  The home is already under contract with Buyer 1, but Buyer 2 submits a contract to the seller, and the seller can add a backup addendum.  When the seller signs the backup contract, it means that if Buyer 1 should cancel their contract for any reason, Buyer 2 is automatically under contract to buy the home.

Multiple backup offers are rare, but are possible as well.  The order that the seller signs these contracts would be the order in which they are entitled to buy the home.  Later offers would, of course, most often be at higher prices.  This would to entice the seller to sign a backup offer instead of putting the home back on the market if the first sale failed.

False Motives?

The problem with backup offers in a competitive buyer situation is that the backup offer actually increases the chances that Buyer 1 will close on the home.  Buyer 2 may feel better that they’re doing something constructive by signing a backup offer, but they’re really giving more incentive for Buyer 1 to expedite the sale.

Buyer 1 has plenty of potential reasons to back out of the contract.  They may find something they don’t like about the neighborhood.  An inspection could reveal structural issues.  A new home just down the street that Buyer 1 likes better might come on the market just a few days later.

When there are multiple backup offers in place, though, Buyer 1 takes on a protective stance.  They know that others want what they have, and they are more likely to forgive inspection issues and be more cooperative in seller negotiations.  If Buyer 2′s offer is at a higher price than Buyer 1′s, it creates even more of a sense to Buyer 1 that they’re getting a great deal.

If It Fails, Do You Really Want It?

There is always the possibility that Buyer 1 will not be able to finance the home, and the sale will revert to Buyer 2.  That’s fairly rare today with how zealously loan originators are scrutinizing loan pre-approvals, but it is a possibility.

Far more often, however, a sale fails because of an issue with the home.  Maybe the roof is falling apart.  The walls could be filled with mold.  The alley behind the home might be a favorite of the local drag-racing kids.  The next door neighbor might play his drum set every night at 3 a.m.

A buyer who is in a backup position automatically takes on a contract for the home when the first buyer opts out.  If a material defect on the property is the reason for Buyer 1 to cancel the sale, why would Buyer 2 want to be automatically under contract to buy this same property?

In General, Backup Offers Reduce Your Competitive Edge

Buyers submit backup offers in competitive situations.  Negotiations require buyers to gain any competitive advantage possible.  By submitting a backup offer, buyers often pigeonhole themselves into a subordinate position, and motivate their competition.

This doesn’t mean that buyers can’t do anything.  Have your Realtor let the listing agent know that you’re waiting in the wings with your buyer if anything goes wrong.  Stay on top of the transaction as it moves along, and if for any reason the sale fails, have your offer submitted immediately.

A buyer can still scoop up a failed sale in one day if their Realtor is on the ball and ready to submit the offer.  By being prepared, but not motivating the competition, home buyers put themselves in the strongest position possible.