Backup offers and why they just might not work to your advantage after all.

Hank Bailey
Hank Bailey
Published on August 21, 2019

backup offer

In a sellers’ real estate market when there are few homes available and a large pool of ready and willing buyers, many of those buyers can feel as if they got left in the dust. It’s aggravating to fall in love with a home only to learn that there are several other offers on the seller’s table. Competition, in this instance, isn’t very welcome.

Just because someone else got his or her feet in the door first doesn’t necessarily mean it’s a done deal. There are many potential pitfalls on the road to closing that may just derail that particular transaction. Should you put in a backup offer though or not?

I’ll address that traditional wisdom in a moment, but why might a sale fall through to begin with?  On that ‘favorite listing’ you thought was lost it would leave a great big opening for you to step into.

Let’s take a look at some of the most common hazards that cause contracts to fail.

Loan problems

Many homebuyers don’t understand that most lenders will perform what is known as a “soft pull” of their credit reports just before closing. This is done to ensure the lender that none of the borrower’s financials have changed.

Any change, whether it is a new job, loss of a job, piling up debt on a credit card (wait until escrow closes to buy that new furniture), may result in the buyer’s mortgage being denied – even at the last minute. Naturally, if this happens, your backup offer automatically steps up to primary position.

Low appraisal

If the buyer in first position is obtaining a mortgage, the lender will want the home appraised to ensure that it isn’t lending more money than the home is worth. If the appraiser determines that the home is worth less than he or she offered, it will deny the mortgage.

In this case, the buyer can dispute the appraisal, request that the seller lower the price, opt to pay the difference between the offering price and the appraised value in cash, negotiate with the seller to pay half of the difference or walk away from the deal.

Again, if he or she walks, you win. But, keep in mind that your bank’s appraiser may also come in lower than the asking price, so think about the aforementioned options.

Problems with the home inspection results

The home inspector is responsible for pointing out problems in the home that are visible. In other words, he or she cannot tell a homebuyer what’s lurking under the floorboards or behind walls.

Most professional inspectors take their jobs quite seriously, and will note even the smallest of details, however. Large photos of a small crack in a wall can be alarming to some buyers, and larger problems may cause the entire deal to fall apart.

Buyer’s home sale falls apart

Many homebuyers are also home-sellers and create a contingency in the purchase agreement that states the purchase is based on the successful sale of their current homes. It’s a tricky process – trying to time the sale of one home to purchase another – and it frequently causes the death of the purchase. Their loss, however, is potentially your gain.

What you need to know about the backup offer

Backup offers don’t always get the home, but enough of them do so if you love the house, common advice is to consider submitting one.

If you make a backup offer that’s accepted, you’re in prime position, if that first position buyer walks away, to move into a first position contract on the home and immediately begin your own due diligence.

Once the backup offer is accepted and signed, make sure you ensure that you are approved for the amount you’re offering and fully prepared to follow through on the purchase. Technically binding date, inspection or contingency timelines, don’t start until you move to a first position contract though so that’s good news.

If the seller’s current buyer backs out for any reason, your offer is already accepted, so there is no renegotiation. Make sure that when you submit the backup offer you’ve included all contingencies that are important to you.

Why you might not make a backup offer

As a professional negotiator, a.k.a a Realtor, I see emotion on both sides of a sale. The one thing that I’ve noticed over the years is that if a seller has a contract in hand, why would they take “less” on a backup offer? What I mean is, why would they negotiate with you? There’s no motivation. They are sitting pretty, in their minds, with a contract in hand and to accept a contract for a backup they will normally want what their asking price is (or better) to make it work for them.  You as a buyer are not operating at a point of leverage when they are under contract.

On the contrary, I’ve seen over the years that when a sale, which was in their minds as a rock solid done deal, has now fallen apart the result is that they are left in a position of being just, well, FINE.  To quote a favorite movie of mine, FINE stands for Freaked out, Insecure, Neurotic, and Emotional.  They have no doubt called movers, found that next ‘dream home’ of their own they now don’t want to lose, and are making plans for the future. In their minds, the house is SOLD!

When that sale falls through however now they have to think about putting their plans on hold, and mentally they are already gone from the present living situation, they have to keep the house clean to show it again, and overall they aren’t happy campers.  That’s when an offer comes in that’s even ‘lower’ than their previous offer and contract they had just agreed to and they are much more willing to negotiate and grab it! I’ve seen sellers take the first offer to come along over and over again because they just want it back under contract again. The sooner the better!

As a good buyer’s agent, when my clients find a home that they love that’s pending or where multiple offers beats us out, I stay close to the listing agent. I become their text buddy and long lost friend! I follow up all the way through due diligence to other contingencies to continue to stay in the loop on the status of the sale. You know what happens when and if it does fail? I’m the first person who knows about it for my clients because I’ve kept up with that listing agent over those days and sometimes ‘weeks.’

Then we are able to negotiate a deal that’s good for my buyer. Not just a back up list price sale as a ‘just in case’ for the seller.

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