of“I have heard about ‘back-up’ contracts. How do these work and do they benefit buyers or sellers of homes?”
–A Santa Monica Homeowner
What is a Back-up Contract?
A “back-up” contract is what the home seller can negotiate or agree to with a potential buyer, other than the one who already has a purchase agreement signed for that property. Real estate agents change the home listing status in the MLS (Multiple Listing Service) to “looking for back-up” once escrow has begun.
What is the Benefit of Having Back-up Contracts in Place?
There is a great deal of potential benefit for a seller as well as for a prospective buyer to have a “back-up” contract in place after a purchase agreement with another buyer already has been signed. The seller enters into a contract to sell their home, which includes various contingency periods, during which time the buyer may elect to terminate the transaction or may fail to obtain financing to complete the purchase.
In such an event, if the seller already has another buyer in line to step into place on short notice, there could be far less delay in the sale process. Also, with an accepted “back-up” position, the seller can still make plans based upon a known sale value and time frames that the original buyer and the “back-up” buyer have agreed to.
This is also a good opportunity for other buyers who really wanted to purchase the same property. By getting a seller to agree to a “first position back-up” contract, the hopeful buyer at least assures that they have the opportunity to purchase this home if the escrow falls apart. The chances of succeeding are fairly good in the current marketplace. This is because the “fall-out” ratio or escrow failure rate in our area is now over 20%.
What’s the Result of Backup Contracts?
A “back-up” contract commonly results during a multiple-offer process, when the seller has accepted one offer but agrees that another one is almost as acceptable. It may also occur soon after a contract has been accepted and someone else then decides they would like to try to buy the home.
The time period of uncertainty is generally 17 days under the current sales contract form being used. During this 17-day investigation period, buyers might choose to cancel the purchase transaction, maybe for even minor issues, which leaves sellers disappointed in having to begin the marketing process again. Although it may take several weeks to know if they have succeeded, a “back-up” buyer is also free to continue looking at other alternatives, and terminate their “back-up” position at any time they may negotiate a purchase contract on a different home. Plus, there is no risk to the buyer for having this position.
I had a home in escrow for more than three months without a “back-up” contract. There were other interested parties when the contract was accepted, but the seller decided not to have any back-up buyers. When the buyer failed to close, we had to start the process all over and it delayed the seller’s plans by many weeks.
The purchase contract form used for “back-up” offers provides for more than one position of “back-up.” I once had a listing situation where the sixth position “back-up” buyer was successful in buying the home!
Hopefully this helps both buyers and sellers realize the value they can have from the opportunity to agree upon “back-up” contracts. This can clearly be beneficial to both the seller and the “back-up” buyer.
