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Published on 10/20/1997 All articles from this issue

Backup offers: the pros and cons for buyers and sellers

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By Carol Tiegs / Town Crier Staff Writer

It may seem exciting to be in a real estate market so hot it generates backup offers on the sale of homes, but are there negatives to accepting a backup?

A backup offer is an offer to buy a home that already has a sales contract pending with another buyer. If the original buyer backs out or is unable to perform on the contract, the backup buyer is in position to proceed with the home purchase.

"It allows you, as a buyer, to establish a price, terms and conditions today and continue to look for another piece of property and back out (of the backup offer) if you find one," said Gary Wheeler, manager of the Los Altos office of Coldwell Banker/Cornish & Carey. "It allows you to be in first position if buyer No. 1 gets over-aggressive and gets buyer's remorse."

"It allows the seller to feel secure," Wheeler said. "He doesn't have to start the sales process all over if buyer No. 1 can't perform"

"The only negative for the buyer is the emotional aspect of not being able to get the home, the uncertainty," Wheeler said. "Backups are on the lower side of getting into position. With a hot market, buyer No. 1 is generally performing well."

Brett Thomas, vice president and manager of Los Altos Alain Pinel Realtors, offers the example of a home recently listed for $800,000 in Los Altos.

The agent's staging, price strategy and marketing generated three offers on the home, Thomas said. Due to multiple offers, the home sells for $850,000, a price two of the buyers will pay, but one has slightly better terms.

For the seller, the pros of accepting a backup offer are that the seller can accept a backup that may be higher than the price they'd get if the first deal falls through and the house goes back on the market, Thomas said.

"The longer the home sits, the less buyers will pay, since they think that there isn't as much interest in the home," he said. "Also, a backup offer sometimes puts implicit pressure on the first offer to perform, since it means there is less negotiating the first buyer can do once in escrow given that there is someone right behind them hoping to move into first position."

"The biggest negative for a seller would be the risk that the first buyer backs out and, by chance, a second buyer, who wasn't around when the home first went on the market happens to be willing to offer more than the accepted backup offer."

In Thomas' example, the seller chose to accept a backup offer at a similar price to their first offer, and that offer performed.

The advantage for a buyer being in backup position is that they may be able to secure the house without having to compete in another round of multiple offers later, Thomas said.

"The obvious negative for a buyer going into backup position is that, since the most activity on a home typically occurs in the first 90 days, by not being in backup position on a home that had, for instance, only two offers, the buyer could possibly negotiate a better price if the first buyer backs out and there are no other offers," he said.

The critical role of the real estate agent, Wheeler and Thomas agree, is to monitor the status of the offer and keep parties informed, and make sure the backup offer is canceled if the buyer finds another property.