The listing agent’s explanation as to why my clients offer didn’t get accepted was all too familiar.
“Sorry Ken, the sellers accepted a cash offer at a higher price. But you can always submit a back up offer.”
Yes, I could and I would discuss that possibility with my clients; however, I’m not usually a big fan of back-up offers. The odds of winning a jackpot at Red Hawk Casino would be better than a cash offer going south on that home. Besides, why put my clients through the emotional torture of patiently waiting around following the steady progression of another buyer’s escrow on the house that they fell in love with. It would be like watching the girl of your dreams walk down the aisle with another. No, with these buyers and this house I would mention a back-up as a possibility and then get them back in the field looking at others houses.
In our low-inventory market, back-up offers are becoming more frequent. The California Association of Realtors reports that nearly half of all new median-priced listings sell within the first two weeks of being listed and two-thirds of them receive multiple offers. Contingency free and cash buyers have the edge over buyers who need financing. Subsequently, the popular thinking on back-up offers is: If you can’t be in first position on a house negotiate for second and, who knows, you may get lucky.
Prior to 2012, written back-up offers weren’t all that common. If a buyer missed out on a house, no big deal; they simply put in an offer on another home down the street. If the house was really special, the buyer’s agent might call the listing agent and ask them to let them know if anything happen on their accepted offer. That informal arrangement worked well until all the listed houses down the street disappeared. Verbal misunderstandings about whom to call and when became frequent. Now, all back-up offers are in writing.
A back-up offer is in second position to the accepted primary offer. If and when the accepted offer unravels, the back-up offer slips into first position. A back-up offer is negotiated as a separate and distinct purchase agreement from the accepted offer. The price and terms may vary. As an example, the accepted offer may be for cash without any financing but the accepted back-up offer may allow for financing. A seller can accept more than one back-up offer, all with different terms.
Having an accepted back-up offer on a property doesn’t usually commit the back-up buyer to put their life on hold and wait around to see what’s happening with the accepted offer. They are free to keep shopping and make offers on others properties as they like. Their back-up offer remains valid until they give notice of cancellation to the seller or the seller closes escrow with the accepted offer. Back-up offers may, but don’t normally require, the buyer’s earnest money to be deposited. If and when the accepted primary offer fails to close, the back-up offeree will have the time allotted in their purchase contract for inspections, obtaining financing and closing.
There are circumstances that justify buyers and sellers entering into back-up purchase agreements. Sellers will take a back-up offer as insurance because not every escrow closes. The first buyer may have a problem qualifying for a loan or a “deal killer” issue is discovered during the whole house inspection or the buyer just gets cold feet. Then the seller already has another sale negotiated. Buyers enter into back-up offers because there are few similar homes for sale, there is little risk and they may get lucky.
There are some negative issues to making and accepting a back-up offer. While the buyer can walk from a back-up offer at any time, it commits the seller to a contract and opening escrow with the back-up offeree, should the primary offer go sideways. Why would they do that in an appreciating market with limited number homes for sale? Perhaps the seller would receive an even higher offer by putting the house back on the open market. Back-up offers benefit sellers in a declining market not when homes are appreciating monthly.
The risk for a buyer with a back-up offer is the emotional attachment to the home. Imagine the agony of the experience.
Buying a home is a big decision and often requires years of financial sacrifices so the buyer is in the position to move forward. Then, in order to get approved for a loan, a buyer’s most personal financial information is examined, displayed and verified by who knows how many people. Then buyers may spend weeks searching for something special. Finally, they find the perfect home. They quickly have their agent prepare a full-price offer. They anxiously await the seller’s acceptance. They share their excitement with their close friends and family. A few days later they discover the seller accepted another offer. But wait, their agent tells them there is still hope. Something can happen to the first offer and so we should be in back-up position. They anxiously wait and wait while other opportunities slip by.
Not all buyers have that emotional attachment to a special home. They can move forward without looking back. It is, however, a consideration when deciding whether to negotiate for a back-up position. Why be second place when you can be first?
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his Website: kencalhooon.com