With the increase in real estate activity this spring, and the lack of inventory of homes for sale, many home are selling quickly, and multiple offers are somewhat common. If your offer is not the winning offer, you may be asked if you want to submit a back-up offer.
1. What is a back-up contract?
Basically, you negotiate an acceptable contract to the seller, but with a back-up addendum attached. The back-up addendum specifies that if the original contract terminates by a specified date, then your contract will automatically become the primary contract, and you will then automatically be under contract with no chance for other buyers to submit offers.
2. Why would I want to submit a back-up contract? Can't I just ask the listing agent to let me know if their contract terminates and then just re-submit my offer?
When a contract terminates, the agent may change it back to "active" in MLS immediately, before he/she thinks to call people who had originally submitted offers. This opens you back up to competing with other new buyers for the home and finding yourself back in a multiple offer situation. Also, listing agents are human, and sometimes they forget that you told them that, or they can't find your contact information when the original contract terminates. So, the house may go back on the market to the public, and you may not know about it, so you may miss it again. In a hot market, the listing agent knows that they will likely find another buyer quickly, and they may not care if it is you or someone else. Their client ends up happy either way. But boy, does it make you mad when you find out you missed out again when the listing agent promised to call you if the contract falls apart!!! So, if you really, really love a house that you don't get, it is the best way to ensure that you get a solid second chance if anything happens.
3. Why would I not want to submit one?
When you submit a back-up contract, you still have to submit earnest money and option fee money to the listing agent. So, your money is tied up on a house that you still may not end up getting. You can keep looking at other homes, but if you find one you like, you will need to terminate your back-up contract (using your option period) in order to get your earnest money back to put down on another house. A bit of a hassle... If you don't really, really love the house, then it's probably best to just keep watching it, but also looking for other homes, and keep your earnest money freed up for when you find another house you like.
4. What are the chances that a house under contract is actually going to terminate?
In a "hot" market like this, buyers have to make decisions about whether to make an offer on a home much more quickly than they do in a slow market. So, the likelihood is higher that contracts will terminate because buyers haven't had as much time to consider whether the house is really the right one for them. They have to move quickly, so they put the house under contract, then later figure out that it isn't quite what they want after they have had a little time to look at it again and think about it. Also, they often rush the lenders to give pre-qualification letters to submit with their offer (hurry, hurry!), and the lender hasn't quite had time to really look at their whole situation. So, in this type of market, it is more likely that after they have had time to really review the buyer's financial situation, it isn't quite as rosy as they first thought...so the buyer ends up having to terminate the contract because of financing issues.
I have over 11 years of experience as a Realtor in the Austin real estate market, and I have been through several cycles of slow "buyers' markets", and hot "sellers' markets". Both markets present challenges, and both present opportunities. Let me help you navigate the current market to minimize the challenges and take advantage of the opportunities that the current market presents to help make your next move your best one ever!