What Is a Backup Offer in Real Estate?
What You Should Know
- A backup offer is a legally binding contract that allows buyers to make offers on houses that already have an offer on them.
- The buyer will be the next one in line for the house if the seller accepts their backup offer and the initial offer falls through.
- If the initial buyer closes on the home, then you will be released of any obligations on the contract and you will be returned any amount you may have put as earnest money.
What is a Backup Offer?
If the house a buyer is interested in already has an offer which has been accepted by the seller, that means that another buyer is in the process of closing on the house. However, other buyers are still allowed to make backup offers. If the seller accepts the backup offer of another buyer, they will be the one next in line for the house if the first offer falls through. A backup offer is a legally binding document.
On the other hand, if the initial buyer closes on the house, then the other buyer who made a backup offer will be released from all obligations on the contract and will be returned any money that they might have put as earnest money. You can still back away from a backup offer while the initial buyer has not closed yet. However, before making a backup offer, you need to be certain that this is the home you want to purchase, because you will have to close on it if the initial offer falls through. According to the National Association of Realtors, there is a 7% chance of a real estate transaction falling apart.
How to Make a Backup Offer?
The process of making a backup offer is pretty similar to making a typical offer on a house. The most important aspect of making a backup offer is figuring out what price to offer for the house. The solution to this will depend on the market the house is being sold in.
Cold Market
In a cold market, homes tend to stay longer on the market. Therefore, to prevent this, sellers would want to have a backup offer so that they do not have to start the process from the beginning and relist their home in case the initial buyer doesn’t close. This means that you can offer the seller the listing price or even a price that is slightly lower.
Hot Market
In a hot real estate market, sellers are at a favorable position, so offering just the listing price will probably not impress them. A hot market is a competitive market for buyers, where sellers receive multiple offers and they can also accept multiple backup offers. In order for yours to be accepted, you will have to offer a competitive price and terms. If you are not sure how much is competitive enough, make sure to work with your real estate agent who is more knowledgeable on the conditions of the housing market and the values of similar properties.
Show that you are a serious buyer
Make sure that you have a mortgage pre-approval ready so that the seller can seriously evaluate your offer. Making an earnest money deposit is another thing that may help improve your chances
Favorable terms
Make sure to limit the contingencies in order to make your offer seem more appealing.
Accepting Backup Offers
As a seller, backup offers provide you with the convenience of not having to go back in the searching process and having to relist your home again. This saves you time and also makes the home look wanted in the eyes of the primary and other potential buyers. It is worth mentioning that you can accept more than one backup offer. However, it is important to think carefully before doing so, since you will have to go through with it if the primary offer falls through. Thus, when evaluating backup offers, make sure to look at them just as you would see an initial offer, and not as a safe option that ensures your house will be sold. Sometimes, it may be more beneficial to simply put the house on the market again.
Pros and Cons of Backup Offers for Buyers
If you are in the home buying process and you are considering making a backup offer on a house, make sure you evaluate the following benefits and drawbacks to making a backup offer.
| Pros | Cons |
|---|---|
| Get your dream home | Incentive for initial buyer to purchase |
| Less competition | Legally binding |
| Why did the offer fall through | |
| Delays in house hunting |
Pros
- Get your dream home
Backup offers provide an opportunity for interested buyers to still have a chance at purchasing their dream home even if there is an existing offer on it.
- Less competition
By making a backup offer to the seller, you are basically reserving your place in line in case that the first offer falls through and the seller accepts your backup offer. This puts you in an advantageous position, compared to making an offer when the home is in the market and where tens of buyers may be making the same offer. However, it is important to mention that there can be more than one backup offer on a house. Therefore, you wouldn’t want to wait if you are certain that the house is your dream home. Otherwise, you would be further in line and you could only hope that the initial offer and all the other backup offers before yours fall through, for you to have a shot at purchasing.
Cons
- Incentive for initial buyer to purchase
If the initial buyer wants to back off the home, a backup offer may change their mind. Backup offers show that a house is desirable and that other people are ready to purchase it if available. This may make the initial buyer reconsider and entice them to hold onto the house, which works against the buyer with the backup offer.
- Legally binding
If you make a backup offer on a house and the seller accepts it, you will have to abide by the obligations of the contract if the first offer falls through. It may happen that you find another house that you like better, but if you don’t back off the backup offer on time, you will have to purchase the first house if the initial offer doesn’t close. Moreover, if this happens, you will probably lose your earnest money deposit if you do not close on the deal. Therefore, if you do make a backup offer, first make sure that you have searched the market and this is the home for you. Second, make sure to act quickly in case that you later on find a house that better suits
- Why did the offer fall through
Just as a backup offer has an effect on the initial buyer to hold onto the house by making the house look more desirable, similarly when that buyer backs away from the offer, it may raise suspicions. Was there something wrong with the house to make the buyer back off? Were issues revealed by the home inspection? Are there a lot of noises in the area to cause disturbance?
- Delays in house hunting
Buyers who make a backup offer may be a bit uncertain on where they stand in the process of house hunting. Should they wait to see if the initial buyer will purchase the house? Should they keep looking for other houses? When should they back off the backup offer? All these questions raise uncertainties for the buyer and cause delays in the house hunting process.
Pros and Cons for Sellers
Backup offers present pros and cons for sellers as well.
| Pros | Cons |
|---|---|
| Safety Net | Higher DOM |
| Saves time | |
| Makes the home look more desirable |
Pros
- Safety Net
The seller does not have to go back and relist the property in case the primary buyer backs off. By accepting backup offers, they allow themselves to have options.
- Saves Time
If the first offer falls through, the seller simply starts the closing process again with a new buyer. They do not have to start a new search for buyers or put their house on the market again since they already accepted a backup offer while in the process of negotiating with the primary buyer.
- Makes the home look more desirable
If there are a lot of backup offers on the home, people see that the house is wanted. Because of this, the primary buyer is more inclined to buy and the buyers of the backup offers may make their price and terms more appealing.
Cons
- Higher DOM
The only drawback of accepting backup offers for sellers relates to the ‘Days On Market’ number on the MLS listing for different statuses. When the seller is in the closing process with the primary buyer, the status on the MLS says “pending”. From the moment the pending status appears, DOM stops accumulating. On the other hand, when the seller is accepting backup offers, the status on the MLS losing will say “ accepting backup offers” and this causes the DOM to continue accumulating.
FAQ - Backup Offers
Should I submit a backup offer?
If after a thorough house hunting process, you are certain that the house is your dream home, then you should make a backup offer. Remember that your offer will go under contract if the first one falls through, so make sure to carefully evaluate the pros and cons of backup offers before making one.
Do backup offers get accepted?
Yes, backup offers do get accepted, since there are a number of benefits for sellers who have backup offers just in case their first one falls through. However, you have to make sure that your backup offer is competitive enough to be accepted.
Is a backup offer binding?
Yes, a backup offer is binding. This means that if the first offer by the primary buyer falls through, your offer will go under contract and you will have to start the process of closing on the home.
Can you withdraw a backup offer?
Yes, if the buyer who made a backup offer decides at any point in time before the initial buyer backs off the deal, that they no longer want to purchase the house, they can withdraw their backup offer. If you want to withdraw your offer after the first one falls through, you will be losing any earnest money you may have put towards the house.