A backup offer is a secondary offer on a home that is already under contract, positioning you as the next buyer if the initial sale fails. While only about 5% of residential sales fall through, according to recent ATTOM data, submitting a competitive backup offer can be a strategic move if you are not in a hurry and have found your ideal property. This guide explains how backup offers work and the key considerations before making one.
How Does a Backup Offer Work?
The process functions as a safety net for the seller and a potential opportunity for a buyer. When a property is listed as "pending" or "under contract," the seller has accepted an offer but may still entertain backup offers. If you submit one and the seller accepts, you may sign a backup offer contract. This is a legally binding agreement that only activates if the primary contract is terminated. Until that point, you are not obligated to purchase the home, and you can continue looking at other properties.
What Are the Pros and Cons of a Backup Offer?
Potential Advantages:
- Second Chance at a Home: It provides an opportunity to purchase a home you love if the first deal collapses due to financing, inspection issues, or the buyer simply backing out.
- Efficiency for the Seller: If the primary deal fails, the backup contract automatically moves into first position, saving the seller from relisting the property and restarting negotiations.
Key Considerations:
- Low Probability: Based on market data, the vast majority of pending sales close successfully. Your offer is unlikely to lead to a sale.
- Process Delays: Having an accepted backup offer means your home search is effectively on hold while you wait for the primary sale to close or fail.
- Underlying Property Issues: The reason the first deal fell through could be significant problems uncovered during a home inspection, which you would then inherit.
What Should You Consider Before Submitting a Backup Offer?
Before proceeding, assess your personal circumstances and the specific property situation.
- Evaluate the Line: Ask your real estate agent to inquire how many other backup offers, if any, are already in line ahead of yours. The odds decrease with each additional backup offer.
- Make a Competitive Offer: To stand out, consider presenting a strong offer. This could involve a slightly higher purchase price, an all-cash offer (which waives the financing contingency), or limiting other contingencies. However, it is generally prudent to retain an inspection contingency, which allows you to back out if serious defects are found.
- Understand the Contract: A backup offer becomes legally binding once the seller signs a backup contract. If the primary buyer backs out, you are contractually obligated to proceed with the purchase, subject to any contingencies you included.
4 Practical Tips for Crafting a Strong Backup Offer
- Consult Your Real Estate Agent: A seasoned agent can provide crucial context on local market norms and help you draft a compelling offer.
- Consider an Escalation Clause: An escalation clause is a provision stating you are willing to outbid any other offers by a certain amount, up to a specified maximum price. This can make your offer more attractive without initially overbidding.
- Keep Your Contingencies: While making a strong offer is wise, avoid waiving essential protections like the inspection contingency unless you are fully aware of the risks.
- Stay Pre-approved: Maintain your mortgage pre-approval so you are ready to move quickly if your backup offer is activated.
In conclusion, a backup offer is a low-probability but potentially high-reward strategy for patient buyers who find a perfect home already under contract. The decision hinges on your timeline and risk tolerance. The most critical steps are to consult with your agent, make a competitive yet protected offer, and understand that you are essentially betting on a small chance that the primary sale will fail.
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