I just lost a bid for a house. Should I put in a backup offer?

Competitive bidding for houses is up dramatically at the moment. If you lose out to another bidder, you may consider putting in a backup offer. Is is worth it?

How real estate contracts work

egg raceWhen a home buyer and seller reach mutual agreement on all contract terms, the seller is obligated to sell the home to that buyer, provided that the buyer performs as described in the contract. Said another way, once a seller has full written agreement to sell to one buyer, they can’t sell it to anyone else.

A backup offer is another contract signed by the seller and a second buyer which states that if the first buyer’s transaction falls through, the seller is obligated to sell the home to the second buyer under an agreed upon set of terms. You can stack agreements like this one behind another to have 3 or 4 backup agreements.

Will the seller accept a backup offer?

Not every seller will have an incentive to accept a backup offer. If they have high confidence that the first buyer will get the deal closed, in may be a useless paperwork exercise. For a home in high demand, you might as well simply place it back on the market for more competing bids if the first offer fails.

Usually sellers will be interested in accepting a backup offer when there is some worry that the first buyer may close. Even then, it is a hassle to sign more paperwork, so there needs to be a compelling case to bother.

Is it beneficial to a buyer to be in backup position?

On one hand, it is a great idea to be a backup buyer. You can contractually obligate the seller to sell to you next if the first buyer falls through. What’s not to like about that?

The downside is that the seller and their real estate agent will use your backup offer as pressure on the first buyer, whether you want them to or not. If the first buyer wants all sorts of concessions after their inspection, the savvy seller would say “Sorry, I’m not going to agree. I’ve got already got another buyer in backup position if you no longer want the property.” Remember that the backup buyer is the only one with a big incentive for the first buyer’s deal to fail. The seller, their real estate agent and the first buyer all have larger incentives to make things work out on the first deal.

The sheer existence of a backup offer will be used against the backup buyer routinely.

Backup offers can work

If the home is very unique and your housing criteria sufficiently narrow, you might as well try to maximize your chance to get that one-of-a-kind house.

Short sales are another instance where backup offers routinely come into play. Extended bank approval times means that many initial short sale offers fail when the first buyer gets impatient. Short sale sellers are not incented to care about purchase price, and simply want the offer most like to close and get the process over with. They may be quite willing to accept a backup bidder.

You’ll need to weigh the pros and cons before submitting a backup offer. In some instances, it may help you to get a home that you initially lost, but in others, it may be a pointless paperwork exercise that is simply used to pressure the first buyer to complete the deal.