Backup Offers: How to use this strategy successfully in the current market.
With record-low inventory levels and an unusually high pool of buyers, properties are flying out the door, well over asking, and in some cases are sold before processing.
This places a whole new value and weighted leverage to backup offers.
But I need to make one thing very clear: A backup offer is non-existent unless it is signed off, in writing.
So when a listing agent tells you that “they will hold your offer in backup position”, that means absolutely nothing unless you have a signed backup offer in writing. No matter what the listing agent says, get it in writing. Why? Whatever good intentions the listing agent and seller have towards giving you a verbal agreement on holding your offer as backup, I guarantee there will most likely be another buyer willing to trump your verbally accepted backup offer. And quite honestly, "holding" your offer as backup has no legal leverage to it at all. Should the first offer fall out of escrow without you having a backup offer in writing, what that will most likely mean is a whole new bidding war all over again, and the listing agent's commitment to have kept your backup offer becomes useless.
What is the premise behind a backup offer? The main one is that the negotiation and terms of the offer are completed and put into writing. That means if the first offer falls out of escrow, then the backup offer automatically goes into escrow, pending receipt of the written cancellation of the prior escrow, without any further negotiation.
The other important premise is that your backup offer is in the #1 position. The seller has the right to accept as many backup offers as they wish, but there is a definite stipulated sequence as to which ones are first in line.
And lastly, in general about 25% of all escrows fall out for various reasons. So if you are able to get a backup offer signed off, that means you have a 25% chance of getting the property under contract.
In California, we actually have a Backup Offer Addendum that the California Association of Realtors has derived in the last few months that is used just for these purposes. Like always, there is a document for everything, so use it and you’ll avoid any potential grief later on.
One of the advantages of getting a backup offer accepted is that most of the time, the seller is fairly satisfied and comfortable already having the property in escrow. So their normal scrutiny of the offer will not be as intense as the first offer. I use the term “letting their guard down” very loosely because a good listing agent will use just as much diligence with a backup offer as the initial accepted offer (if they’re doing their job).
Another advantage is that most buyers are too impatient, and/or have an agent that does not want to invest the time into writing backup offers, so there is very little activity with this kind of offer. That means that your competition as a buyer should be very little with writing backup offers.
One very important thing to keep in mind: Never forget that although it is a backup offer you are writing, it is still a contract. If you are fortunate enough to get an accepted backup offer in writing, note that once the first offer officially cancels in writing, your offer automatically goes into escrow. The only exception to that being if you stipulate a maximum waiting period that if exceeded, voids the contract. So don’t thing that if you go around town spraying backup offers all over the place and sign off on them that it’s the most prudent thing to do. You may find yourself in legal jeopardy should you end up in escrow on more than one property.
And make sure you check your Kharma insurance policy. Use caution when writing backup offers. How would you like to be the seller that accepts your backup offer, the first escrow cancels, they turn to your backup offer, and then the backup buyer ends up cancelling because one of the other 26 backup offers that they wrote came in? The seller is actually gaging their current escrow knowing that they have a backup offer in place. It in fact DOES affect how they handle the current escrow. If it turns out they are cancelling their current escrow knowing they have your backup offer in place, when in reality you've skipped town because you're already in escrow on another backup offer that came into play, that means they have to market their property all over again. Had they had known this, they probably would have negotiatated with the first escrow a little differently.
But overall, if used wisely, the backup offer strategy works! If you are diligent with it, you will end up in escrow, and you’ll end up in a happy box in this crazy market.
Comments(35)