What is a backup offer? Should you make one — or accept one?
In hyper-competitive real estate markets, particularly when inventory is low, it’s not unusual for a newly listed property listing to receive an offer within just a few days. It’s a situation that can leave prospective buyers feeling both frustrated and discouraged.
But even if someone else’s offer got accepted before you got the chance to bid, it doesn’t necessarily mean all is lost. Real estate deals have been known to fall through, for any number of reasons: for example, financing not being secured as expected, contingencies not being met or the home inspection uncovering something the primary buyer is not willing to take on. In such cases, it can be advantageous to position yourself as next in line. You can do this by submitting what’s known as a backup offer. It’s no guarantee, but if it pays off, you might still land that property you fell in love with.
What is a backup offer?
A backup offer is an offer submitted even after the seller has accepted an offer from another buyer. Securing backup offers is a step that’s often taken by sellers in markets where inventory is low and there’s significant competition.
Much like any home offer, a backup offer typically involves the buyer entering into a legally binding contract with the seller. In this case, though, the contract stipulates that if the existing contract with the primary buyer falls through, the backup offer immediately moves into the primary position. The seller must also include language about the right to accept backup offers in their contract with the primary buyer.
“When a seller wants to retain the legal right to accept a backup offer, that right is written into the contract with the primary buyer — it’s known as a kick-out clause,” says Kathleen “Katie” Severance, a Realtor with Douglas Elliman in Palm Beach, Florida, and the author of “The Brilliant Home Buyer.”
“A kick-out clause states that the seller can continue to show the property even while under contract and then enter into a backup contract,” Severance says. “But the contract with the primary buyer would have to be terminated first.”
Making a backup offer as a buyer
If you have your heart set on a property that’s already under contract, making a backup offer can be a smart move. For one thing, it gives you a chance to still buy the home, should the primary deal fall through. You’ll want to strategize with your real estate agent about making the strongest, most competitive offer possible, just as if you were making the primary offer.
However, think carefully before proceeding — in some cases, a backup offer can have drawbacks. “The mere existence of a backup offer can sometimes strengthen the resolve of the primary buyer, shoring up the deal and possibly even driving up the price,” says Severance.
In addition, making a backup offer on a home is not unlike making a primary offer in that you’re required to make an earnest money deposit in an escrow account. That could tie up your cash if another home comes along that you’re interested in. If the primary deal on the property closes successfully, however, your earnest money will be returned.
Accepting a backup offer as a seller
For a seller, there are very few downsides to having a backup offer in hand. In fact, knowing there’s someone else waiting in the wings can make the primary buyer more determined to close quickly.
“Essentially, they are a built-in fall-back plan if the buyer in first position has an unappealing contingency, like the need to sell another property, or if they try to haggle, renegotiate or are not meeting deadlines,” says Severance. “The primary buyer is much less likely to create problems for the seller in the first place, if they are made aware that backup offers exist.”
And if the primary deal does fall through, having a backup offer eliminates the need to market the property all over again and host a new round of showings. It can help in another way as well: Homes that are relisted as “back on market” are sometimes viewed in a negative light. Prospective buyers may suspect that the initial contract fell through because something is wrong with the home. In such cases, the seller may ultimately make less money on the sale — if it sells at all.
“Backup offers are considered protection for sellers because they save time, money, hassle and stress,” says Severance.
However, there is one caveat to consider. As a seller, you are bound by the legal contract you enter into with a backup offer. And there can be some risks in doing this if market prices shift substantially during the time during the time it took the primary deal to fall apart. If home prices increase during that time period, you may feel like you’re leaving money on the table.
Is a backup offer likely to become a sale?
There is no guarantee that a backup offer will ultimately lead to a successful purchase. It’s always possible, but statistically, it’s not very likely. In fact, just 5 percent of home purchase contracts fell through in the last quarter of 2022, according to a year-end report from the National Association of Realtors. That means 95 percent of contracts closed successfully.
“It’s true that real estate deals fall apart all the time. But they are less likely to fall apart when there are multiple parties interested in the same property,” says Severance. “The buyer in the primary position will be more inclined to keep the deal together if they know other buyers are standing by waiting for something to go wrong.”
That said, if you have your heart set on a particular home, making a backup offer can still be worth it — you just might get lucky.
Bottom line
As a homebuyer, backup offers are an option to consider if another buyer has beaten you to the punch on a home you love. When making a backup offer, you’ll need to be prepared to provide an earnest deposit, tying up your money while the primary offer is reviewed and negotiated. And the chances of the primary deal falling through are small. Still, it does happen, and if it does, this step can really pay off.
