Backup Offers, What Are They?

What they are ( and what they're not ... )

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:

WHAT BACKUP OFFERS ARE NOT: An iron-clad guarantee of a specific outcome or ultimate purchase price, especially for the seller — unless of course a buyer is willing to a) submit a written back-up offer, b) with earnest money delivered in advance of moving into first position, and c) require "specific performance" of themselves (Contract to Buy Section 20.1.1). Maybe that buyer exists somewhere, but if they do I have yet to meet them.

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.

IN SUMMARY — While in theory a backup offer can provide some nominal advantages in the right circumstances, they can also come with equal or greater risk, locking both parties into a course of action before potentially important facts have even had time to develop.

At the end of the day, a 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, those are the magic ingredients for good deals to come together — and stay together ... and with those factors in place a contract can be written, accepted, and revised at any time. Kinda cool really. :)

My advice? Patience and thoughtfulness almost always pay off, especially in important matters like this. Slow down, act carefully, communicate clearly, act in good faith always, 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.

SCHWINGSTATE, 5440 Ward Road, Suite 110, Arvada, CO 80002

(303) 638-8711, michelle@schwingstate.com

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