Getting lucky with a back-up offer

It’s sometimes better to be lucky than good. There are a number of things I have accomplished in my life because I studied, worked hard, saved for a rainy day, heeded the advice of others with greater wisdom and made a good decision. But there are a number of successes I have had simply because I was at the right place at the right time. It had nothing to do with intelligence, experience or taking good advice from others. It had to do with luck. My guardian angel either pushed me out of harm’s way or placed me in a favorable position where good things had a way of happening.

We all know people who seem to be luckier than others. Around the first century Roman philosopher Seneca said, “Luck is what happens when preparation meets opportunity.” Luck is selective and usually favors people who have prepared themselves or have put themselves into a position to take advantage of a situation. Buyers who diligently search for a home are luckier than those who only look occasionally. Sellers who prepare their home for sale are luckier at selling than ones who don’t.

Tom was a lucky client, who decided one afternoon he wanted to buy a house that he had seen during an open house. He explained to the agent holding the open house that if he liked the house, I would be representing him. The agent was very gracious and showed him the home, answered his questions and shared with him that there were other interested parties and that if he really liked the home he should contact me immediately and write an offer.

I was watching a 49ers game when he called. “Hey Ken, I am sitting in my car across from a house I want to buy. Can you drop whatever you’re doing and help me?”

What I thought about saying was: “Look Tom, it’s the 3^rd quarter and as soon as the game is over, my wife Vicki has a list of home maintenance items that I need to spend time doing.”

What I said was, “That’s terrific. I will be right there.”

Three days later the sellers reviewed the offers on their home and accepted another offer. “What rotten luck.” Tom said. “Oh well, maybe something else will come up that I like.”

Tom was feeling really awful about his offer not getting accepted. I knew that despite what he said about looking at other homes, he wouldn’t. The experience of losing out on that home would stay with him a long time. Tom was a passive/submissive personality and he would guard against putting himself in that situation again.

“Hold on,” I said. “Why don’t we write a back-up offer and see what happens?”

Back-up offers are negotiated between buyers and sellers just like any other offer until the price and terms are acceptable to both parties. The one difference is the back-up offer is subject to the collapse of the accepted offer that is in primary position. If for some reason the buyer didn’t qualify for their loan, or lost interest in the property during the inspection period, Tom’s back-up offer would be elevated to primary without the listing coming back on the market and available to other buyers. A back-up offer should always provide the buyer with the opportunity of cancelling their back-up offer at any time until they are notified that their offer is in primary position.

The advantage to sellers accepting a back-up offer is that they have two or more acceptable purchase contracts. In the event one has issues, no problem, cancel that offer and work with the next offer in line. The cancellation of a sale, once escrow was opened, used to be pretty rare but is happening more frequently. Here’s why.

The unintended consequences of the Dodd-Frank Act (Wall Street Reform and Consumer Protection Act signed by President Obama in July of 2010) are that more real estate deals are cancelling. Government regulations and oversight have made it more profitable for banks to invest in securities than lending mortgage money. Every loan application is carefully scrutinized by a cadre of processors, underwriters and quality control departments. Low ball appraisals from out of area appraisers are also notorious for killing deals.

Once a seller has accepted the buyer’s back-up offer, no further momentum is required. Back-up buyers wait patiently in the background for some sign that the primary buyer is having problems. Back-up buyers don’t open escrow or conduct inspections. They simply take a wait and see position. Waiting on the disposition of the primary offer can be costly. While back-up buyers are waiting, others great homes are coming on the market.

Sellers with one or more back-up offers have a tendency to develop a bit of an attitude. They are less likely to negotiate who pays for any repairs discovered during the inspection period or back off their price in the event of a lower appraisal. Over-confidence can backfire against unreasonable sellers who often discover that their back-up buyers, if they are still around, have similar concerns as the primary buyers.

Tom waited four weeks and got lucky. The primary buyers could not qualify for a loan even though the appraisal came in $10,000 less than their agreed upon purchase price. Tom was willing to pay a bit more than the appraisal but his price was well below his original offer. Most back-up offers don’t go anyplace because most primary buyers are able to complete their purchase but occasionally we all get lucky.

Ken Calhoon is a real estate broker in El Dorado County and can be reached through his website at kencalhoon.com.