A backup offer in real estate is a contract that a seller holds in reserve in case their executed deal falls through. Sellers have many reasons to consider other deals. The most common and obvious is that If the first falls through the seller has another to consider in reserve. Some other reasons include:
- The executed contract has a home sale contingency
- Inspections may be contentious
- The buyer may want to roll closing costs into the mortgage, and so they seller may worry about the appraisal
- The seller may worry about the buyer’s ability to get financing
All these reasons make it very common for sellers to take backups. If you want to submit a contract you should, but keep in mind that the seller cannot accept it unless their current deal falls apart.1
Difference Between Pending and Accepting Backup Offers
Pending deals don’t have any more contingencies meet, so they are ready to close. They are just waiting for the final paperwork, so there is no point to submit another contract. A house under contract but accepting backups still has contingencies, so the deal may still fall through.
Should I Make a Backup Offer in Real Estate?
Whether you should make a backup offer on a house depends on several factors. How much do you like the house? Can you find another comparable house without a contract? How competitive is the market in your area?
How to Write a Backup Offer in Real Estate
You write a backup offer just like you would if yours was the first. You negotiate terms with the seller and sign it the same way. If the first falls through, yours is first in line and becomes the newly executed contract. Make sure it’s the offer that you want to make.
- Deals do fall through, so it is possible that you get the house
- Your executed contract prevents the house from going back on the market
- It offers the seller peace of mind and leverage in negotiating with the first buyer
Sellers usually want backup offers if they feel uncomfortable about their deal. If they get a backup offer, they like it gives them the opportunity to be more reluctant to fix problems that come up during home inspection.2
How to Present a Backup Offer
You should present a backup offer the same as you would the first offer. Things that motivate sellers for a first offer attract them to sign yours as well.
- Get a mortgage preapproval and submit it with the contract.
- Limit contingencies as much as you can.
- You do need to add one contingency. It states that your contract becomes invalid if the current primary closes.
- Specify a date in your contract that the seller must return your earnest money if their primary deal doesn’t close by then.
- Request that the seller notifies you in writing if they cancel the first contract and yours becomes primary.
Balance the offer’s attractiveness and your interests’ protection. Get your money back in a timely way, whether the primary closes or drags on for a long time. You also want to know if the first deal falls through in a timely way, because you must complete your transaction in a timely manner if it becomes primary.
Remember, though, that the seller already has a deal, and they must go through the process of closing it. To get them to sign you want to make it as attractive as you can (just like a first offer). A nice touch is to add a letter introducing yourself. In it tell the seller why you think their home is special, and why you particularly want to purchase it. Tell them what features you like and let them know you will take care of it. Remember, it is their home, and they have an emotional attachment. Let them know you want to make a similar attachment.3
How to Cancel a Backup Offer
If you are the buyer, you can cancel the offer at any time. However, if you are the seller then it is a binding agreement, and you can’t cancel it unless your primary closes. While it is an executed contract there are differences from a primary.
- If you are a buyer, you can continue to look for a house and cancel your deal if you find another house.
- If you include the proper clause you can decide if you want your contract elevated to the primary. You can still decide if you really want the house before it becomes binding.
- While the seller gets peace of mind, the contract binds them legally from the time they sign it.
Whether you can back out depends on whether you are the buyer or seller. There are advantages for both, however.
Final Thoughts on a Backup Offer in Real Estate
If you find a home that you really like and it already has a contract, you still should consider making a backup offer. Remember, though, that while deals do fall through for many reasons it is rare. Keep looking for another home and you may find one that you like even more.
If you do submit one, then make sure that you structure it to protect yourself. Most of the time a deal falls apart because there is something wrong with the home inspection, or the buyer can’t get financing. Know why the first deal fell through and make sure that you really want the house.