Are backup offers a valuable tool in the tool box?

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If you have ever experienced a brisk Sellers’ market or noticed a cream puff property one day too late, you are likely familiar with the concept of backup offers. Even though the backup offer can be a valuable tool in the professional REALTORS^® tool box, many agents shy away from its use thinking it is too complicated or trying to create a backup offer without first considering some key points. Let’s walk through some of the things you need to think about when considering if a backup offer will work for your situation.

Buyers side:
The first thing to consider is if the property is significantly unique so that the buyer's desire to potentially purchase the property outweighs their ability to find something else similar. For example, if the buyer could buy the same basic property a block over, they may simply want to negotiate an offer on that one instead.

Second, the buyer needs to clearly understand that a backup offer has the same responsibilities and obligations as a regular offer, and isn’t just a placeholder if they don’t find anything better in the meantime. They are agreeing to act in good faith and make their best efforts to fulfill the contract, even in a backup position.

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Sellers side:
The first consideration is if your seller is interested in committing themselves to another buyer at a fixed price and terms in the event the first offer fails to remove conditions. In a rising market, the seller may think they are better off going back on the market, or they may be more interested in the security of having an additional offer waiting in the wings. The seller should get the pros and cons from a professional REALTOR^® before proceeding.

Second, the seller should understand that when they accept a backup offer, they are agreeing to sell the property for a fixed price and terms just like a normal offer acceptance. Because of this, the seller must understand any amendment or extension to the primary offer while a backup offer is in place can be very litigious.

Thirdly, a backup offer does offer a clear advantage in some cases to a seller where they have some level of security that they will likely sell either to the first or to the second offer. Also, just the existence of a backup offer, if the seller instructs their REALTOR^® to disclose its existence, may prevent the first offer from trying to renegotiate the contract after a home inspection or appraisal.

So how do you create a backup offer you ask? Simple, you are already a pro at negotiating an offer, and that is how it starts. Under the law, all offers must be presented, so if you write an offer on a conditionally sold property the seller’s REALTOR^® must present it to the seller. Once negotiating the price, terms, and conditions as normal, now the secret sauce on the final contract is adding a condition, or in rare cases, a term, to make it a backup offer.

Seller Condition method
The seller condition method is preferred because it uses a clear process of waiver/non-waiver to rigidly determine if/when the backup offer advances to the first position or ends. Simply add an additional seller’s condition stating

“Subject to the seller being released from all obligations under a previously accepted purchase contract # [insert purchase contract number provided by the seller’s REALTOR®], on or before [insert time and date suitable for the seller to know if the first offer has completed or collapsed]. The seller agrees not to alter or extend the previously accepted purchase contract.”

Tada! Once the seller and buyer have signed, you have a backup offer in place. Now there will be a very clear and orderly progression of transaction where the seller will either waive or non-waive the seller’s condition of backup offer giving the buyer an indelible indication of when they are the primary offer.

Contract Term method (seek legal advice if using)
In some cases, you may be tempted to opt for a contract term instead of a condition. It is often viewed as favoring the buyer and in effect ‘forcing’ the backup offer into the first position on a fixed date and time. But the use of a term instead of a seller’s condition is not only clunky but can invite both contract frustration and litigation. In addition, the attempt at crafting a term that adequately protects both buyer and seller is difficult and should not be attempted without legal counsel.