Inman

The win-win real estate backup offer

Q: What is a good time frame to place on a backup offer if I want to stay in the loop but still create a short window for the seller to remove the offer that is first in line? –Diane

A: Let’s make sure we’re all on the same page, before I get to your question. What normally happens is that a buyer makes an offer to buy a home. Once the buyer and seller come to a meeting of the minds on the sale price and other terms, the seller signs the offer (or a counteroffer, if any were made) and makes it a binding contract.

In real estate, contracts are generally contingent on a number of conditions — the buyer often retains the right to back out of the contract pending the ability to secure financing, pending inspections, and pending the ability to secure homeowners insurance and title insurance. In an increasing number of cases these days, the buyer also makes an offer contingent on the ability to sell a home.

When a seller takes a backup offer, usually it is in the time frame between acceptance of the first-place offer and the time the buyer removes contingencies. In a normal case, that time frame runs anywhere from 15-20 days — although if the transaction envisioned is a short sale or if the buyer’s contingency involves the sale of the buyer’s own home, that time frame may run longer.

Sometimes the backup offer is put in place, as in the case with many short sales, because the seller knows it may take a very long time — as long as three, six or eight months, sometimes longer — to obtain the bank approval needed for the short sale to proceed.

The seller puts a backup offer in place in order to hedge against the first-place buyer walking away during the long wait. In these cases, the backup offer should plan to be on hold for many weeks or months. And in the event the first-place offer walks away, there are possibly more weeks and months that may pass before the bank finally approves the contract — if it does approve the contract.

In "regular" transactions (i.e., non-short sales), it is rare that a backup offer ever gets put in first place. Rather than a backup offeror placing pressure on the seller to "remove" the first-place offer, a backup offer is usually used by the seller as a strategy to put pressure on the buyer who is in first place.

Sellers frequently, and legitimately, use backup offers to coerce the first-place buyer to actually perform — to close the deal, without requesting repairs or trying to renegotiate the price after the inspections or appraisal come in.

The mere fact that another qualified buyer is chomping at the bit to get the place, wanting it so much that that buyer actually wrote up an offer and got into contract, only works to make the place seem much more desirable than it was before.

Any qualms or concerns or buyer’s remorse magically disappears in the face of a backup offer; if the backup offer is for a higher price than the original, this effect is only amplified!

Not only does the first-place buyer’s emotional attachment skyrocket because someone else desperately wants what they have (or soon will), they also feel that they’ve gotten a great deal and are walking into homeownership with instant equity, as someone else is willing to pay more for the place than they are!

The long and the short of it is that if you make a backup offer, you should do so with no expectation that you’ll eventually get into contract. Hope, sure, but not expectation. And there’s nothing that you can do in particular to lean on the seller, except to offer a lot and cross your fingers.

If the property is not a short sale, you should expect to have an answer on your backup offer within the first-place buyer’s contingency period, roughly 10-20 days. If it is a short sale, it may take many moons to receive an answer, and there’s nothing you or anyone else can do to speed that up.