RealAnswers

Two different RealNews readers wrote in with similar questions: “What is a real estate backup contract?” and “What does backup mean in real estate?”

In real estate, a backup contract or backup offer is simply a transaction that doesn’t take place unless another transaction, usually called the “primary” transaction, falls through. Generally speaking it’s most common that a buyer will make an offer on a property that is already under contract with another buyer and that offer must be a backup offer. The buyer is obligated to proceed with the sale if the seller notifies the buyer that the backup offer has become the primary offer. The seller is also obligated, but only if the primary contract fails. There may be other terms of the sale, such as financing or inspections, as with any other contract. The buyer may be able to revoke the over until a date specified in the offer, if that is specified as part of the offer, but generally the buyer is obligated and usually with a deposit at stake, while the seller is only obligated if the primary offer fails.

Depending on market conditions and the qualifications of the buyer on the primary contract, there’s a reasonable chance that the primary will fail to close. Here are some scenarios where that might happen:

• Buyer’s credit score changes due to a major credit purchase
• Buyer loses a job or job buyer was moving for fails to materialize
• Buyer simply backs out
• Property doesn’t appraise for high enough value
• Inspection reveals fault in the property

In the first three circumstances, a qualified buyer can step in and often close even quicker as all title work and other seller’s side matters are already settled. In the last two circumstances, a backup buyer may want the property even though the primary buyer didn’t - perhaps the backup buyer has sufficient down payment to close even with a lower appraisal or is willing to accept the property with the deficiencies shown by the inspection.

On the seller’s side, it’s easy to see why a backup offer is desirable. It essentially doubles the chance of a successful closing. Why would a buyer want to get involved in a backup contract? The answers vary, but they include:

• A tight seller’s market
• Very specific property requirements
• A particularly good deal
• A great location

The bottom line on the buyer’s side is that for whatever reason a particular property is so much better than anything else available that the buyer is willing to make an offer and tie up a deposit for 15-45 days to see if the primary offer closes.

Still have other questions about backup contracts? Ask a question!

Technorati Tags: real estate, backup, contract, offer