Updated: Aug 13, 2019
Important information on entering into a backup offer situation for both sides of the transaction.
There you are, looking for the house. It has the perfect square footage, the perfect placement of rooms, the perfect neighborhood.
You call your agent, "Hey Jen, I want to see 1234 Dream Home Way."
Jen calls you back, "Sorry, they have an accepted offer..."
It's a discouraging blow to the soul. Not something you want to hear. Buying a house in a seller's market can be very stressful.
"...BUT," Jen says, "the seller is willing accept a backup offer."
Wait, what? What's that? Is that even possible?
Yes, it is very possible and happens more than you think.
A backup offer is exactly how it sounds. It says there is an existing offer in place and, if the first offer cancels for any reason, your offer becomes the next accepted offer.
Great news, right? Sure. It can be. But you need to protect yourself. MAYBE a better house comes along. Then what do you do? You might think you're stuck. And you could be, if your agent doesn't put provisions in the contract to protect you.
The average contract takes about 45 days. Without proper language in your backup offer purchase agreement, you could be tangled in this transaction, for the entire timeline of the first contract.
You need to make sure you can get out of this offer, but you should make this provision as fair as you can for all parties. Your agent should have something written in your contract stating the offer is good for so many days and the you can rescind your offer at any point after that time frame.
For example (as written by Michigan Association of Realtors): In the event that the Seller does not notify the Buyer that this back-up offer is in first position within two (2) weeks of the date hereof, the Buyer may at any time thereafter declare this agreement null and void by providing written notice of same to the Seller.
I suggest going a step further, for clarification, by stating the purchasers' earnest money deposit shall be returned to them upon rescinding this backup offer.
Keep in mind, your agent's brokerage, their local real estate association, or their multi-list cooperative most likely have rules that might make it more difficult for a seller to review and accept backup offers. In some states, it may not even be possible. But, as adults, by now, we should all know that it never hurts to ask!
Sellers, should be conscientious in their path of reviewing offers for backup situations. Some purchasers do not like the threat of a backup offer being in position. So, after intentions are disclosed of keeping the home available for a backup offer, buyers may not wish to enter into a purchase agreement for the home. If they're serious buyers, in my opinion, they shouldn't have an issue with backup offers. But, the most important thing for you and your agent to do is to disclose and communicate as much information as possible- without exposing your cards.
Not only should you disclose this information, which is commonly required by local regulations, your agent should give notice to other real estate agents who are potentially showing your home to other prospective buyers. It's also in your best interest to protect yourself against miscommunications with any accepted backup offer. Be sure to add a provision to any backup purchase agreement stating that the purchaser understands their offer is a backup offer and you, the seller, have the right to renegotiate or modify the first offer in place.
For example (as written by Michigan Association of Realtors): Buyer acknowledges that this Agreement is a back-up offer which shall be effective only in the event that the closing on the prior purchase agreement on the property does not take place for any reason. Buyer acknowledges that nothing in this Agreement shall in any way restrict the right of the Seller to modify the terms of the prior purchase agreement as Seller shall, in his sole discretion, deem advisable.
In summary, backup offers aren't a bad thing. The seller might have a slight upper hand in a backup offer situation; however, if their home is truly the home for you, why would you want to miss the opportunity? Get in line!
For more information regarding your real estate goals, contact us today!