Backup Offers: Making Property Available, Seeing Property & Making Offers After Already Under Contract
- Adam Garrett
- Feb 11, 2023
- 10 min read
Updated: Feb 24
In this article, I'll go over backup offers from a buyer and seller standpoint.
Importance of Continued Showings After Initial Contracts for Sellers
I Highly Recommend Sellers to Allow Showings Until Property is "Clear to Close" w/ no Remaining Contingencies. Sometimes a seller will want to stop showings immediately after a buyer goes under contract, no matter how many contingencies and no matter how weak the offer. I would strongly discourage that. Here's why:
A home inspection request of repairs or other concessions can come back that is completely unreasonable.
I've seen where a home that was in fantastic shape had a buyer nickel and diming as much as they thought they could, where the buyer's agent seemed a bit embarrassed to even make as many requests on behalf of the buyer, to the tune of 10's of thousands of dollars & a high % of the contract price.
I've also seen where we had a buyer give us a list of dozens of repair requests that could have cost us 10's of thousands of dollars on a home that needed more work despite the fact that we gave them a home inspection before their initial offer and the majority of their requests were from items on that initial home inspection, where I subsequently encouraged another buyer to see the home and make an offer. That other buyer was provided the home inspection that we provided the other buyer, we shared some material adverse facts not on it, and made an as-is offer. In that offer, they requested only 1 repair, & didn't require an appraisal in the significantly better offer. We ratified a contingent offer (contingent on the release of the other contract) before terminating the offer with the other buyer who requested a lot after the repair negotiation period expired without ever giving them a formal shot at a renegotiation with a rejection or a counter of their repair requests.
When There's No Home Inspection, There are Still Risks When Financing is Involved
Many things can happen between the time of a contract being ratified and a buyer being clear to close. Even if a home inspection contingency is removed, I've seen where a buyer lost their good job (that they had for years) due to a layoff and was no longer qualified to purchase.
Even if No Home Inspection or Financing is Involved, There are Still Risks
For example:
A. if a seller's title search doesn't show any problems, but a buyer's title search does, correcting title defects can take time, and if the buyer isn't willing to wait, could kill the deal.
B. Things can also get complicated if the buyer dies or commits bankruptcy.
C. If a seller hasn't met all their obligations in time for closing (& any built-in extension, if applicable) due to unforeseen circumstances (i.e. death of an immediate family member or being hospitalized while on vacation in another country before moving plans), and the buyer would simply prefer to walk, they typically have an out there.
Sometimes buyers ask about performing showings on properties already under contract or making offers on properties already under contract. I typically don’t recommend it because it's typically a waste of everyone's time including the buyer's and the occupant's, but there are some exceptions:
Pending Release
If a property is listed as under contract, but the agent says that it's pending release, now's a solid time to make an offer if you want to make a backup offer.
“1st Right of Refusal” or “Kickout Clause”
A property that has a “1st right of refusal” or “kickout clause” is one where there’s an option to make an offer that the seller can actually use, if the offer is strong enough, to “kick out” another buyer under contract, typically if the 1st buyer is unwilling to release some sort of contingency within a certain time frame, such as 24-72 hrs. If the 1st buyer has a home sale contingency, that’s a common reason for a “kickout clause”.
Quick Offers on Certain REOs
With a typical offer, it's best to thoroughly research a property, perform a showing there, & write up a full-blown offer. That offer includes 16 pages typically in Hampton Roads plus an updated preapproval &/or proof of funds plus addendums like the residential property disclosure, association forms, lead-based paint form if built before 1972, military aircraft form in a number of Hampton Roads cities, etc.
In some cases, investors may be making lots of offers on homes for more of a shotgun approach than a sniper approach. In those cases, quick offers, present on some REO's, can reduce the amount of time involved in an offer and increase the reasoning to make a backup offer because of less time involved.
That said, there are a few caveats that are important to note:
If you get under contract with a home inspection contingency, you should pay for a home inspection to be able to get out of the contract via that contingency. If you don't want to pay for it, you may lose your earnest money deposit if the seller fights it after you walk since home inspectors in VA have a license for home inspecting. If you're not willing to come up with the funds for a home inspection after ruling it out at a showing after getting under contract, I wouldn't recommend making offers on properties due to the potential liability.
If you get under contract after doing minimal research and not seeing a property, it makes it harder to make offers on other properties unless you have the funds or preapproval necessary to do more than 1 property at a time. REO's often take a while for the other side to sign off on something, so if you want out of the contract to make an offer on something else, you may lose out on another offer while waiting for a release. If you make an offer without a release, you should state in a new offer that you are making the offer contingent on release from the other offer, which diminishes the quality of the new offer.
Unusually Unique Criteria
If the criteria of the buyer is such that the kinds of properties that they are looking for is extremely rare (not just because the property is their favorite) and the buyer has a higher than typical amount of cash on hand to make a very strong offer. For instance, a buyer might consider it if they cared more about a specific property they want than getting a "good deal" by offering an amount far above asking price (such as 10% over asking price via an escalation clause for properties >$100k, & higher than 10% for properties <$100k) with a large guarantee above appraisal (i.e. 10% of the offer amount) who has the cash to make that happen.
Willingness to Make Unusually Strong Backup Offer & Take Risks to Secure the Home
Another case of when a backup offer can work out is when you make an unusually strong offer to purchase the house or other property & are able to waive contingencies that the current offer already has.
For instance, if the current offer on a house has a home inspection contingency in place, sometimes sellers/listing agents will allow other home inspections & other inspections to occur prior to a backup offer in order to give buyers the ability to waive a home inspection or other inspection within the offer itself. Another possibility to to submit and secure a backup offer and then perform a home inspection before or immediately after the primary contract's inspection takes place. You risk losing any money you put into the home inspection if it doesn't work out, but especially if other contingencies are involved where your offer would be superior (i.e. appraisal for a VA loan with the current contract vs no appraisal with your offer if you can do that, such as with a cash offer or some conventional 20+% down offers for high credit borrowers with certain homes), a backup offer can be a great option for a seller if the buyer's requests after contract ratification are substantive, & sometimes these requests can exceed 10% of the contract price of a home, even with a home that isn't a fixer upper.
Offers Converted to Backup Offers:
At times, offers made on homes prior to contract ratification with another buyer can be converted to backup offers. These offers are the most viable possibilities of backup offers in my opinion.
Why Offers Made Prior to Contract Converted to Backup Offers are the Best Backup Offers
1. A buyer who "lost out" on a property that they made an offer on prior to contract ratification with another seller gets a 2nd shot in some cases.
2. It's common for buyers to have already seen the property.
3. It takes minimal time to convert an offer to a backup offer.
4. In some cases, you can get a free home inspection as a backup offer from the other buyer. That said, don't bank on it. While the seller is supposed to disclose all material adverse facts, sometimes buyers pull out of the contract without sharing the home inspection. Also, the buyer would need to provide authorization for future buyers to see the home inspection as it is the property of the buyer. While all buyers should in my opinion as long as the seller doesn't object, and my releases with buyers include a provision for that, many buyers releasing sellers don't care. Even when a seller receives a home inspection and authorization from the buyer to share it with others, some sellers don't want to even though they should, and will be unwilling to disclose any material adverse facts even though they should.
Differences in How Backup Offers Are Structured
In some cases, backup offers are created verbally/via text without a very formal structure. In other cases, backup offers have buyer and seller signing into a contractual agreement contingent on the other buyer walking. If no contract is signed, the buyer can walk at any time because the offer remains a backup offer, not a true backup contract. If a true backup contract is signed, things get more complicated.
If you're the seller, it's not a bad idea to request that the buyers sign off on their offer being a backup offer if you don't think that you'd get as strong of an offer from someone else the 2nd time around.
If you're the buyer, while you might be willing to sign off on something if the seller requests it, I typically don't recommend initiating that request. If you do, be sure to request the inclusion of a kickout clause (see above for details) such as for 24 hrs in case you find something else that meets your criteria while you're waiting on the situation with the buyer under contract.
Key Questions for backup offers/showings:
1. How strong is the current contract?
Are they willing to share details like:
contract price,
contingencies present (& any upcoming deadlines for the biggest contingencies, if possible),
financing,
buyer/seller concessions,
2. Are there any backup offers, & how strong are they?
Look for the same details as with the current contract.
3. Are pre-backup-offer inspections available to remove contingencies of a backup offer?
While you risk wasting your money with a pre-offer inspection, you can mitigate some of your risks when initially seeing the property befor the home inspection by using a highly detailed and knowledgeable agent (or someone else who is highly knowledgeable about homes other than a home inspector, like a Class A contractor, who would likely know more than most agents) when you see the property the 1st time, reducing the # of surprises that come at the time of the home inspection. With an agent like that, you are also a lot better covered on the kind of feedback that a home inspector or class A contractor wouldn't pick up, some of which might be ascertained before a showing ever takes place.
In some cases, a seller might even have their own inspections that they are authorized to share with you.
Potential Issues with Backup Offers:
1. If you don't have a solid search going with an agent yet, your time would typically be much more effective with getting an updated search than it would making a backup offer.
The best way to avoid being late to the party is to be early to the party. The best way to get properties under contract before someone else is by performing showings and making offers soon after a property is listed. I often get contacted by buyers regarding properties that have been on the market for a while before they went under contract where the buyer hadn't gotten a search together effectively with an agent or where they were not quick on the draw with the search they had going. Conversely, I've worked with buyers who got a property under contract before a superior offer was presented on the same house where the seller wasn't able to release us in favor of that superior offer.
If you have already got an effective search going with an agent, then consider making backup offers, but I wouldn't recommend doing so prior.
Related:
1. Why In-Person or Virtual Face-to-Face & Screen Share Search Set-Up Meetings Are Best
2. Tips for Search Creation with Your Agent
4. Zillow Searches & Other Public Website Searches Vs MLS Searches
2. Holding You Back on Other Offers if You Don't Have the Funds for 2 Properties
If you make a backup offer, you aren’t prohibited from making other offers and performing other showings, but I don’t recommend making other offers unless you first withdraw the backup offer. If you get under contract after doing minimal research and not seeing a property, it makes it harder to make offers on other properties unless you have the funds or preapproval necessary to do more than 1 property at a time. REO's & some sellers can take a while for the other side to sign off on something, so if you want out of the contract to make an offer on something else, you may lose out on another offer while waiting for a release. If you make an offer without a release, you should state in a new offer that you are making the offer contingent on release from the other offer, which diminishes the quality of the new offer.
3. Payment for Home Inspection May be Needed to Back Out
If you get under contract with a home inspection contingency, you should pay for a home inspection to be able to get out of the contract via that contingency. If you don't want to pay for it, you may lose your earnest money deposit if the seller fights it after you walk since home inspectors in VA have a license for home inspecting. If you're not willing to come up with the funds for a home inspection after ruling it out at a showing after getting under contract, I wouldn't recommend making offers on properties due to the potential liability even if the seller won't typically fight it as long as you are within the home inspection contingency period.
4. Often, we won’t know what another contract amount is for.
While not typical, some properties go under contract for 50% above asking price, & sometimes listing agents can be completely unresponsive as to the nature of the current contract.
5. No More Showings Sometimes After a Contract Ratified
Sometimes, if a home is under contract, the occupant or seller won't allow additional showings even if a contingency is present.
Related:
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