Should You Make Or Accept A Backup Offer On A Home Sale?
Kevin Graham5-minute read
March 29, 2023
So, you’ve found the home of your dreams, and it’s for sale, but in a cruel twist of fate, it already has an offer on it. Though it may be that you’ll just have to accept the loss and move on in your search, all hope is not lost.
Home purchase transactions fall through for all sorts of reasons, from contingencies not being met to financing issues, so it can’t hurt to position yourself to potentially pick up the pieces of a broken deal and get into a home you’d had your eye on.
This is where the backup offer comes in.
What Is A Backup Offer?
In home buying, a backup offer is made in acknowledgment of an existing offer and ensures a contract with the seller if that first offer falls through. It’s a legally binding contract that, if accepted by the seller, will put you next in line to purchase the home should the first buyer back out. In return for the seller’s promise that the buyer is next in line, the buyer makes an earnest money deposit into an escrow account. We’ll be focusing on this meaning of the term.
Sometimes, the term is used as a shorthand, in listings, for “under contract – accepting offers” or “pending” to mean that the seller is still showing the home in case the contingencies included in the first contract aren’t met. These are not true backup offers, although they may become contracts while the new parties wait to see if the first party can or will complete the deal.
If the original offer successfully closes, you’ll be released from your contract and any earnest money you put into escrow will be returned.
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How Do Buyers Make A Backup Offer On A House?
Making a backup offer is similar to making a regular offer. A seller considers and accepts a backup offer just as they would a primary offer, so it’s important to strategize if you want yours to be accepted.
Work with an experienced real estate agent to negotiate an acceptable price, as they’ll be the expert on your local market and have a better grasp on what a competitive offer looks like.
The Amount Of Your Offer
Pricing a backup offer can be a little tricky. After all, you want to price it so that it’s likely to be accepted by the seller. How much you should offer depends on the real estate market in your area.
Pricing In A Cold Market
If you’re buying in a cooler market where homes typically spend longer than average on the market before being sold, you may be able to offer listing price or slightly less. The reasoning behind this is that your backup offer gives the seller a safety net that prevents them from having to reenter the market if their primary offer falls apart. That security may be worth accepting a slightly lower price than the current offer.
Pricing In A Hot Market
On the other hand, you may have to offer more. If you’re buying in a hot market, where bidding wars are frequent, you’ll want to make an offer that exceeds the asking price to have the best odds of your backup offer being accepted. In some really hot markets on highly sought-after properties, it’s possible for a seller to accept multiple backup offers, lined up in the order in which they were accepted. However, it’s already unlikely that the first backup offer will end up coming into play – further backup offers are highly unlikely to move into the primary position.
The Strength Of Your Offer
Just as you would when making a primary offer, make sure your backup offer is strong. Having proof of mortgage approval letter – sometimes called a preapproval letter – ready to go and limiting the contingencies you ask for – like the home inspection contingency – shows that you’re serious about the property and eager to close if the opportunity arises. Sellers accept the highest offer with the least potential of derailment by way of contingencies.
They also need to see proof that the buyer will have the money to pay on closing day. For all-cash buyers, that means they’ll need to attach a proof of funds letter to their offer.
All-cash offers tend to prevail, but a higher bid backed by an approval letter that indicates that purchase is within the borrower’s loan limits and the lender has verified the buyer’s financial documents can be compelling. Your best bet is to produce the strongest possible mortgage approval letter.
Here at Rocket Mortgage, we ask for documentation at the earliest stages of the mortgage approval process, so sellers can rest assured that our Verified ApprovalSM letter 1means that the buyer has been vetted and – barring any problems with the home or changes in the buyer’s financial circumstances – will be approved or we’ll pay the applicant $1,000. It’s in the fine print, which you can read below.
With a Verified Approval letter, home buyers are able to make their offer stand out from the pack of mortgage-financed offers.
For Buyers: What To Consider Before Making A Backup Offer
If you’re considering making a backup offer, there are some pros and cons you should think about first.
Getting Accepted Means You're Under Contract
A true backup offer situation is one in which both the buyer and seller sign a contract which goes into effect if and when the primary purchase agreement ends. A home buyer with the second-best offer won’t automatically be in the backup position should the primary contract fail.
For the seller, the benefit of accepting a backup offer is that, if it’s accepted, you’re seamlessly under contract with the backup buyer if the first buyer backs out. You won’t have to relist, restage and reshow. For the backup buyer, it means that the house won’t go back onto the market and you won’t have to fight with other bidders to put in the winning offer.
The Odds You'll Be Accepted Are Low
Although it’s likely you’ve heard a horror story or two about home purchase agreements that fall through after home inspection or appraisal problems, the overwhelming majority – 93% – of home buyers who enter purchase agreements go on to close on those homes, according to NAR’s April 2022 REALTORS® Confidence Index. That said, the percentage of contracts that didn’t go on to close has increased, from 5% in April 2021 to 7% in April 2022.
Backup offers can also be a hindrance on your home search. Most home purchase contracts go on to successfully close. The odds are that your backup offer won’t come into play, and the time you spend waiting to find out could’ve been better spent looking for houses that don’t have any offers on them.
However, if you already own a home and are only interested in buying that particular home, you may get lucky with a back-up offer. Be careful, because the first contract may have ended due to problems revealed in a home inspection. We’ll discuss that below.
It Can Be Hard To Back Out Of A Backup
If you continue house hunting while you wait for a verdict on the home you have a backup offer on, you could end up in a tricky position if you find a house you like better. Even if you’re able to back out of the offer, it may take some time getting your earnest money back. If you need that money to make another offer, you may have trouble acting fast enough to secure the home you want.
Inspection Contingencies Are Essential
If the primary offer does fall through and your offer goes under contract, you should also consider why the first offer didn’t work out. If there were issues on the buyer’s side, such as financing falling through, that’s less concerning than if the buyer backed out due to issues with the property.
Though you want to be careful about including too many contingencies, the inspection contingency – which gives the buyer the ability to have the home inspected and back out of the contract if repair issues cannot be resolved – is vital to most real estate contracts. It’s especially important when making a backup offer, to ensure that you’re not stuck under contract on a home that has significant issues.
If sellers in the market you’re looking in won’t consider an offer with any contingencies, you may have no choice but to waive the home inspection contingency. You can and should ask for a home inspection regardless of whether you include the contingency so you know what repairs you’ll need to make.
For Sellers: What To Consider Before Accepting Backup Offers
As we already mentioned, having a backup offer on the home they’re selling can be very beneficial for the seller, but there are some potential pitfalls to look out for, too.
Why Home Sellers Should Accept
When you have a backup offer on your home, you won’t have to go back to the time-consuming and stressful process of trying to sell your home. If your first buyer backs out, you’ll already have another buyer waiting to take their place.
Additionally, having a backup offer can make your current buyer more motivated to close because they know there are backup buyers interested in the home who are vying for a chance to get it.
Why Home Sellers Should Think Twice
The seller is as bound by the backup contract as the buyer is. Both parties are taking what’s known as a market risk. That means that if the market changes between when they signed the backup contract and when the first buyer is out of the picture, they may no longer like the amount they agreed to. If house prices have gone up, the seller may feel like they’ve lost out; if the market goes down, the buyer may suddenly find that they’ve agreed to overpay for the home.
If you’re a homeowner looking to sell in a market that shows no signs of slowing down, and you think that in 2 months, you might earn even more from the sale of your home, you’ll likely not want to commit to a backup offer.
The Bottom Line: Consider The Pros And Cons Of Backup Offers
Making a backup offer can help savvy home buyers get into the home they really want even after it’s seemingly been snatched up by another, but both buyers and sellers should take time to consider the pros and cons of making an offer on a home that’s already under contract. Whether this tactic will make sense for you depends on your circumstances and how flexible you’re willing to be.
Ready to get your offers taken seriously in today’s challenging housing market? Apply online today for our Verified Approval and get sellers to say yes to your next offer.
1 Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance and appraisal as well as a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. This offer is not valid for self-employed clients. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.
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