Backup offers, while rare, can become a potential tool on hot properties and in hot markets. Let's take a few minutes to understand a backup offer's purpose, potential, and limitations ... and cover off on reasons why buyers and sellers may want them, or not.
THE BASICS — A backup offer is made in acknowledgment of an existing offer. If accepted and signed by a seller, it ensures a contract with the backup buyer if the first offer falls through. In other words, it's a legally binding contract that puts the backup buyer next in line to purchase the home, if the first buyer backs out for any reason. To show motivation and commitment, the backup buyer can make an earnest money deposit into an escrow account at offer submission. If the original offer successfully closes, the backup buyer is released from their backup contract, and any earnest money that was placed into escrow, is returned.
IMPORTANT! Whether or not the backup buyer’s earnest money is deposited at offer submission or later, at the moment the backup offer becomes the primary contract, the promise to the deliver earnest money has already been made — and that matters.
PROS, CONS, AND REALITY CHECKS — Both buyers and sellers should take time to consider the pros and cons of agreeing to a backup offer on a home which is already under contract. Whether this course will make sense for one party or both depends on individual circumstances and market conditions. The following table breaks down pros, cons, and realities for both sides:
Adding to the concerns described above, backup contracts are infrequently written, even less often close, and require complicated language. They are easily misunderstood (or simply written poorly), and have the potential (even if unintentionally) to create responsibilities and legal exposure for one or both sides of the transaction. Even if perfectly crafted, backup contracts rely on complex deadline and applicability tables which can be confusing for everyone.
WHAT BACKUP OFFERS ARE NOT: An iron clad guarantee of a specific outcome or ultimate purchase price, especially for the seller. While, at least in theory, a backup offer can provide some nominal advantages in the right circumstances, they can also come with equal or greater risks, locking each party into a course of action before potentially important facts have had time to develop.
IN SUMMARY — At the end of the day, any contract is simply an agreement between two parties. For any contract to be successful it takes effective communication, mutual performance, and good faith on both sides. In my experience, motivation, good faith, and cooperation are the magic ingredients for good deals to come together -- and stay together. With those factors in place, a contract can be written, accepted, and even revised at any time.
Yes, having a backup offer might help a few hopeful homebuyers get a home they really want after it went under contract to another person ... but both sides are advised to take time to consider the pros and cons before venturing this route.
My advice? Patience and thoughtfulness almost always pay off, especially in such important matters like this. Slow down, act carefully, communicate clearly, and make informed decisions with the aid of trusted real estate professionals. Also, obtain legal review by a licensed attorney specializing in Colorado real estate matters before writing or accepting a back-up offer. Real estate needs, Colorado? Call me, I'm here to help! 💁♀️
Michelle Schwinghammer is a REALTOR®, Certified Negotiation Expert® and Pricing Strategy Advisor® who helps people move forward in Colorado. She currently serves as the West District Director for the Denver Metro Association of REALTORS and is a recognized expert
on its Market Trends Committee.
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