A guide to Back-Up Offers, and when to consider making one

Today’s question comes from a prospective buyer of waterfront or water access property in the Lakes & Mountains Region of New Hampshire who just learned that a property that they are interested in has gone under agreement with another buyer.  The prospective buyer asks “When should I consider making a backup offer on a property?”

A Back-Up Offer works this way.  After a seller has accepted a P&S and entered into a contract with one buyer (the “primary buyer”), another buyer can make a Back-Up Offer that moves into first position if and when the primary buyer’s offer is declared null and void.  The buyer and seller negotiate a Back-Up Offer just as any other P&S that contains all of the desired terms (price, closing date, financing, inspections, etc.).

Perhaps the best time to make a Back-Up Offer is shortly after a property goes under agreement.  Clearly, a buyer considering such an offer will want to have a good understanding of the current market and a pricing analysis prepared by your buyer’s agent.  Don’t have one?  Now is the time to get free professional assistance.  Your agent’s fee is paid by the seller.

Realistically, a Back-Up Offer is not a time for a buyer to expect a low-ball price or weak financing to get serious consideration from a seller.  However, for a property that the buyer feels is appropriately priced and represents good value, a Back-Up Offer near or above asking price may make sense as this is a low risk way to get access to a desirable property before it comes back onto the market.

One reason for buyers and sellers to consider a Back-Up Offer is that the current market conditions tend to produce deals with greater uncertainty.  The primary offer may be contingent on the sale of other property, inspections or financing.  New regulations and federal oversight have tightened lenders’ criteria.  A Back-Up Offer reduces seller’s risks while being a low risk way for a buyer to be first in line if the primary offer falls apart.

To better understand the Back-Up offer let’s review the basic mechanics of making an offer for real estate.  This discussion is not intended as legal advice and is provided so that real estate consumers have a basis to seek advice of an attorney for their specific situation.

In New Hampshire, making an offer for real estate is a one-step process.  That is, the terms put forward to a seller by a buyer on a New Hampshire Association of Realtors (NHAR) form entitled, Purchase & Sales Agreement (referred to as the “P&S”), if accepted without changes by the seller, becomes a binding contract on both parties.

If changes are made by either party, this is known as a “counter offer.” When either party makes a counter offer, then the other party is not bound by any of the terms of the prior offer or counter offer.  Changes to an offer can be made by marking, initialing and dating them on the offer or by means of a NHAR Counter Offer Form that references the original offer.

When working with buyers and sellers, I prefer the counter offer form because rather than having to pour over five or more pages in a P&S to see what has changed the parties can focus on the few areas where they have yet to agree usually on a single page.  Not only is the form much more legible than a markup, but when the parties are close, an agent can say to their client, “Just sign here and you have a deal.”

It is important to note that went both parties’ signatures are on the counter offer form, then the changes on that counter offer and the other terms in the original referenced offer are binding on the buyer and seller.  The terms of counter offer and referenced offer may be merged into a so-called “clean original” that both parties then sign as part of the permanent record.

Note that the Back-Up Offer is a binding, signed contract subject to the outcome of the offer in first position, not a proposed offer that is held aside without seller acceptance until the outcome of the primary offer is known..  Once a back-up buyer and the seller agree to terms, the back-up buyer’s deposit is cashed and held in escrow.  The seller could accept more than one Back-Up Offer provided the sequence of offers becoming effective was clearly spelled out and disclosed to all parties.

A Back-Up Offer contains a couple of additional provisions.  First, there is specific language saying that the offer, once accepted by the seller, is in back-up position and, if and when the first offer is declared null and void, the seller and buyer agree that the back-up offer becomes the primary deal.  Second, at any time prior to the Back-Up Offer moving into first position, the seller and back-up buyer agree that the back-up buyer can withdraw the back-up offer by written notice to the seller and receive a full refund of deposit.  Often times to streamline the withdrawal, the Back-Up offer will include instructions to the escrow agent “to refund the deposits to the buyer without further written authorization required by either party.”

The timeline for a Back-Up Offer starts when Back-Up Offer moves into first position.  The terms of that offer take effect and that offer moves towards closing including inspections and appraisal if financing is sought.  Note that the results of the primary buyer’s inspections may not be available to the back-up buyer unless the primary buyer elected to disclose the inspection reports to the seller.  The seller cannot compel the primary buyer to disclose the results of their inspections.  However, if the primary buyer did disclose the results of inspections to the seller, then the seller and seller’s agent are obligated to disclose that information to the back-up buyer.

This post was written by:
Chuck Braxton, REALTOR® GRI
Roche Realty Group, Inc.

cbraxton@metrocast.net

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