Backup Offers are a Safety Net for Sellers in a Turbulent Market

Backup offer

def: “A thing to be called on, if necessary; a reserve. A real estate purchase contract that only becomes effective if the current contract cannot close. “In a typical real estate transaction an owner places a home on the market and buyers bring in offers. If the owner accepts an “offer” it then becomes a “contract,” but there’s a catch: Most contracts today are “contingent” agreements. In other words, if certain requirements stipulated within the contract are met, then the transaction will close, but if the contingencies are not met within their specified time periods, then the transaction may cancel, the buyer’s deposit is returned and the sellers will once again try to find a buyer.

One typical contingency is the requirement that the buyer must get financing. Better financing contingencies place a cap on the interest rate and points a buyer can be obligated to pay. Other contingencies can include such things as a home inspection satisfactory to the buyer, closing by a certain date and a requirement that the seller must provide good, marketable and insurable title. In other words, the “contract” between the buyer and seller is dependent upon many things happening sucessfuly. It may not go through for any number of reasons. The result is that owners will often accept one or more back-up offers in case the first contract falls through. Since there can be more than one back-up agreement, offers are often assigned a back up position, i.e. Backup #1, Backup #2, etc. Savvy buyers will often make their back-up offer contingent on their right to withdraw with some warning to the seller, say 72 hours’ notice. This gives a buyer the right to keep looking at other properties while he waits, and not be tied to the first property if he finds another. Once their offer gets withdrawn, the buyer’s deposit gets returned. The buyers need an ability to back out without penalty because they may find a better property, because the sellers have selected another back-up offer (there can be more than one) or for another reason. But how does all of this benefit a seller? How would you like to have a second buyer, waiting in the wings, in case the first buyer changed his mind or failed to qualify for a loan?

Every seller’s dream is to receive offers from more than one buyer. Multiple offers allow the seller to take his choice of price, terms, and buyers, giving him the best odds for a successful closing. In some pockets of both Little Holmby and Brentwood in the last 12 months, listings that were priced right and marketed properly received multiple offers. Most sellers are inclined to accept the highest-priced offer, but this isn’t always the best offer. For example, a seller of a my listing in the flats of Little Holmby received six offers. The two highest offers were close in price, and the seller decided to accept the lower of the two. The terms of that lower offer made it stronger overall, and a few thousand dollars, if it means a successful close, are well worth declining.

The buyer in primary position found some issues during inspections that were going to be costly to repair. The buyer requested a credit through escrow from the seller in the form of a lower purchase price. The seller was able to negotiate from a position of strength because he had several buyers ready, willing, and able, waiting in the wings. Before making a decision about which offer to accept, it’s important to review all of the terms and conditions of the contracts, not just the price. For instance, presume you are a seller who has received two offers. One is quite a bit higher than the other. After reviewing the highest-priced offer, it turned out that the price isn’t really as high as it seems. Added fees and requests for the seller to pay a portion of the buyer’s closing costs make it a less attractive offer. Other terms in the offer must be evaluated as well. The financing proposed in the offers should be scrutinized carefully. In general, the more cash a buyer puts down, the better. Recently a seller reviewed two offers on her house. One of the buyers offered to make a 40 percent cash downpayment. The other was putting 15 percent down. It’s far easier for a buyer to get loan approval in the current market place if the downpayment is 20 percent or more of the purchase price. This makes the first offer vastly more attractive, despite the purchase price.

Close of escrow can be an important factor for some sellers. It can be beneficial for a seller to accept a lower price if the buyer can close quickly. This is particularly so, if the sellers have already purchased and closed on another home. However, if you are still looking, then a longer escrow or a lease after purchase may make one offer more attractive than another. One caveat: Sellers who receive multiple offers are often tempted to counter for a higher price, even when the offer is above the asking price. More than once a seller has said, “Let’s see if we can get a little more.” This is risky. In one recent transaction, my seller received two offers. The highest-priced offer was for more than the list price. The seller countered this offer at an even higher price, deciding to “test the market”. The buyer thought the seller was not serious, and withdrew his offer. The seller ended up selling for much less, many months later.

Remember, too, that the property must appraise for the value at which it sells. There is no point accepting an inflated sales price, in the heat of multiple offers, only to have an appraisal burst the bubble. Strive to get top dollar, but remember not to exceed true market value. So, make an effective marketing strategy, price competitively, and with a little luck, you too could be in the catbird seat.

Next issue: How to set the conditions to receive multiple offers.