Deal Insurance for Home Sellers, or, “The Art of the Backup Offer”
[Editor’s Note: one of the perks — and pleasures — of working for a Berkshire Hathaway affiliate like Edina Realty is having office privileges in hundreds of locations around the U.S. Like in Scottsdale, AZ, where I recently visited. The post below was inspired by Donna Belgram, branch manager at Berkshire Hathaway HomeServices Arizona, who introduced herself while I was there, and with whom I briefly “talked shop” afterwards. Disclaimer: The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway, or any other entity referenced. If you need legal advice, please consult an attorney.]
The best way for a Buyer to win multiple offers is to make the strongest offer with the best terms, that the Seller eagerly accepts.
But, savvy Buyers’ agents know that, especially in overheated housing markets characterized by a shortage of inventory — likely to be true in many U.S. cities in 2018 — there’s a next-best (and very under-utilized) strategy for Buyers who come up short.
Negotiate what’s known as a “Back-up Offer.”
Fickle Buyers & Fall-Thru Risk
For the uninitiated, a Backup Offer is a fully signed Purchase Agreement between a Buyer and Seller that is conditioned upon exactly one, specific event occurring to become valid: the cancellation of a previously written purchase agreement.
What might cause that to happen?
Certainly, a material, unexpected inspection issue could derail deal #1.
But, just as often, in (too) fast-moving markets, emotional, stressed Buyers — which is to say, almost all Buyers — can wake up with a strong case of Buyer’s remorse.
Such Buyers worry that they may have chosen the wrong house (more likely if they just started their home search); that they grossly overpaid; or, worst of all . . . both!
The next day (or day after that), they belatedly come to their senses, and back out.
Backup Buyer Strategy; “Striking While the Iron’s Hot”
Smart listing agents (if not their clients) are all too aware of that risk, and encourage their clients to secure deal #2, just in case.
Meanwhile, by negotiating a Backup offer, a disappointed Buyer who missed out during round #1 can assure that there’s no repeat feeding frenzy, and automatically slide into first position.
In fact, by properly structuring their deal, the Backup Buyer can occasionally strike surprisingly attractive terms (at least, in the context of multiple offers).
The strategy: realizing that, besides the risk of Buyer #1 backing out, the thing Sellers in multiple offers fear most is that their home won’t appraise.
When that’s the case, the Buyer can’t get their financing, and the deal falls apart.
In fact, that’s a genuine risk in a fast-appreciating market, especially if the home has sold for well over asking price.
Fortunately, there’s one way financially qualified Buyers can completely remove that risk while maximizing their offer’s appeal to nervous Sellers: offer cash.
P.S.: Given that logic, why are Backup Offers (financed as well as cash) seemingly so rare?
My two theories: 1) Buyers erroneously believe that they’re locked-in — and off the market — while Deal #1 plays out; 2) the Backup Buyer fears that their offer will give the Seller additional leverage with Buyer #1.
In other words, if Buyer #1 knows that their Seller already has a signed Backup Offer, they’ll be reluctant to aggressively negotiate any inspection issue (and thereby risk losing their deal).
Sort of like the real estate equivalent of The Heisenberg Uncertainty Principle (in layman’s terms, “the observer influences the thing observed”), that can be a real concern for any Buyers waiting in the wings . . .