Monday, January 29, 2007

Should home buyers make backup offers?

What to consider when making this type of offer
Monday, January 29, 2007By Dian HymerInman News

Missing out on a home you'd like to own can be heartbreaking. But, not all home sale transactions close, so you might have a second chance. Or, you could consider making a backup offer.

A backup offer is an offer that is negotiated like any other offer until the buyers and sellers reach a price and terms that are mutually acceptable. A unique term of the agreement is that it is accepted as a backup offer subject to the collapse of a previously accepted offer that is in primary position.

In an active, low inventory market, a seller might receive multiple offers and accept more than one backup offer. In this case, the backup offers would be ranked. For example, backup offer #3 would be subject to the collapse of backup offer #2 and backup offer #2 would be subject to the collapse of the primary offer.

Backup offers also come into play in softer markets. The best listings at the best prices attract the most buyer attention regardless of market conditions. Even in a slow market a prime listing can sell quickly. If you're a little late to the table and no one else beat you to it, you might look into submitting a backup offer. But, first, consider the pros and cons.

One disadvantage is that you may be tempted to postpone looking at any other listings until you find out if the first deal goes through. By doing so, you could potentially miss out on other good properties.

HOUSE HUNTING TIP: If you decide you want a property enough to accept a backup position, continue to look at new listings that fit your parameters. Also make sure that your contract includes a provision that allows you to withdraw from the contract without penalty at any time up until you are notified that your offer is in primary position.

Another disadvantage of being in backup position is that your commitment to buy the property could strengthen the primary buyers' resolve to continue with the transaction, even when issues come up like property defects that might otherwise kill the deal.

Be aware that the sellers may have the right to renegotiate their contract with the primary buyers.

Because of these drawbacks, many buyers shy away from making backup offers. They prefer to wait on the sidelines to see what happens with the first contract. A benefit of this approach is that the sellers might be easier to work with after having had a deal fall apart.

There is, however, a risk in this approach. An attractive listing could draw serious interest from other buyers. If so, one of them might end up in backup position and preclude you from buying the property

When there's an accepted backup offer, a listing doesn't come back on the market when the primary contract fails. The backup buyer is elevated to primary position without giving other buyers a chance to buy the property.

Before deciding whether or not to make a backup offer, try to find out how much interest there is in the property. If there are other buyers serious about the property, it might be worth your while to submit an offer for a backup position.

The other risk of waiting to see if the first deal collapses is that you could find yourself in competition with other buyers who are also waiting to see what happens.

A lot of time and emotional energy goes in to making any offer. Some buyers would rather save this effort for a listing that is definitely available to buy.

THE CLOSING: The best stance to adopt if you're a backup buyer is: If it's meant to be, it will happen.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

Copyright 2007 Dian Hymer, Courtesy of Inman News 01.29.07

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