Is it a good idea to make a backup offer on a house?

Given the recent scarcity of available homes for sale to the general public, there has been a significant increase in competition among homebuyers across the nation. We have seen more multiple-offer situations and bidding wars on homes in recent years than we have in many years.

In the Seattle metropolitan area, sixty percent of real estate listings near major employment centers are sold within thirty days. There are only few months of available housing inventory, whereas 6 months is the norm for a healthy and balanced market.

So many home buyers find their dream home only to discover that the seller has just signed a contract with another buyer. Whether it is the first or third home that a buyer has missed out on, he or she may feel desperate and wonder, "This home is ideal for me; what can I do to save it?"

Backup Offers

Submitting a backup offer is a potential strategy that is growing in popularity. The home is already under contract with Buyer 1, but Buyer 2 shall submit a contract and the seller can add a backup addendum. When the seller signs the backup contract, it means that if Buyer 1 cancels for any reason, Buyer 2 automatically enters into a contract to purchase the home.

Multiple backup offers are uncommon, but possible. The order in which the seller signs these contracts would determine their eligibility to purchase the home. Typically, subsequent offers would be at a higher price. This would entice the seller to sign a backup offer instead of relisting the property if the initial sale fell through.

False intentions?

In a competitive buyer situation, the problem with backup offers is that they increase the likelihood that Buyer 1 will close on the home. Buyer 2 may feel like they're doing something positive by signing a backup offer, but they're actually giving Buyer 1 more incentive to close the deal quickly.

Buyer 1 has numerous potential grounds for contract cancellation. They could discover something they dislike about the neighborhood. An inspection may uncover structural flaws. A few days later, a new home just down the street that Buyer 1 prefers could become available.

When there are multiple backup offers, however, Buyer 1 adopts a defensive stance. They are more likely to overlook inspection issues and be more amenable during seller negotiations if they are aware that others want what they have. If Buyer 2's offer is more expensive than Buyer 1's, it makes Buyer 1 feel like they're getting an even better deal.

Do You Really Want It to Fail?

There is always a chance that Buyer 1 will be unable to secure financing, in which case the sale will revert to Buyer 2. Considering how rigorously loan originators scrutinize loan pre-approvals today, this is relatively uncommon, but it is possible.

Far more frequently, however, a sale fails due to a problem with the house. Perhaps the roof is crumbling. The walls may be contaminated with mold. The alley behind the residence may be favored by local drag racers. The neighbor next door may play his drum set nightly at 3 a.m.

A buyer in the backup position automatically assumes the contract for the home if the first buyer decides to back out. Why would Buyer 2 want to be automatically under contract to purchase the same property if a material defect on the property is the reason Buyer 1 is cancelling the sale?

Generally, backup offers diminish your competitive advantage.

In competitive situations, buyers provide backup offers. In negotiations, buyers must gain every possible competitive advantage. By submitting a backup offer, purchasers frequently place themselves in a subordinate position and encourage their competition.

This does not imply that buyers have no options. Your Realtor should inform the listing agent that you and your buyer are standing by in case anything goes wrong. Monitor the progress of the transaction, and if for any reason the sale falls through, submit your offer immediately.

If the buyer's agent is on the ball and ready to submit an offer, a buyer can still acquire a failed sale in a single day. Homebuyers place themselves in the strongest possible position by being well-prepared, without inciting the competition.