The Housing Scene by Lew Sichelman

Backup Contracts Sometimes Win

It’s always best to come in first when it comes to buying a house. But if the seller accepts another buyer’s offer on the house you want, there’s nothing wrong with coming in second.

If you ask the seller to hold your offer as a backup, there’s a fair chance you could move up if the first contract falls through. And make no mistake: Deals fall through all the time.

Perhaps the buyer couldn’t obtain financing, or is unable to sell his current house. Perhaps a home inspection revealed problems the buyer doesn’t want to deal with, or that the seller refuses to repair. Or maybe the buyer didn’t meet the contract’s timelines for financing and inspections.

If the house you want is a short sale, which often takes two to four months to complete, there’s always the possibility the buyer won’t want to play the waiting game.

“Four out of five buyers who make offers on short sales eventually pull their offers because they get tired of waiting or they find another house,” reports agent Rich Cederberg of eXp Realty in Albuquerque, New Mexico.

I bought a house in Florida a few years ago when the buyer who outbid me backed out. She had thought the house was move-in ready, but it wasn’t. So the bank that had foreclosed on the place came to me, because I had requested that my offer be held as a “just in case” backup.

“We are seeing more homes come back on the market” that had contracts that fell through for one reason or another, says Jeannette Karis, an agent with RE/MAX in Spokane, Washington.

Backup contracts are handled differently in different places. So what follows is a basic discussion of the technique. In such situations, you should align yourself with a quality real estate professional, and perhaps even an attorney versed in real estate law.

Sellers often agree to take other contracts as backup offers as insurance -- a safety net, in you will -- should the accepted offer fall through. This keeps them from having to ever again deal with potential buyers traipsing through their homes. Jane Kontoff, an agent with Keller Williams in Concord, Massachusetts, once listed a property for which the buyer backed out one morning; by the afternoon, the house was under contract with someone else, without ever going back on the market.

Indeed, a backup may be a seller’s secret weapon, used as leverage in keeping the buyer from asking too much in the way of repairs or other concessions.

The mere existence of another offer just sitting there, waiting for the first one to crumble, could have a psychological impact on buyers, pushing them to move forward despite issues they’re not comfortable with. After all, a buyer who plays hardball could end up in a stalemate with the seller, who could decide to hold his ground and move on to the next contract.

Asking for your offer to be held as a backup is a smart move: It doesn’t cost anything, first of all. And if the first buyer’s inspection uncovers significant flaws in the property, the seller has to disclose them, and you will know about them without having to pay for your own examination.

But buyers who find themselves in second place must be careful. If you keep looking at other houses (which you should), and find one you like just as well or better, you could find yourself in the precarious position of having contracts on two places. It’s a good idea to put a time limit on the first offer -- say, 30 or 45 days.

At the same time, a time limit puts added pressure on the seller to swim or cut bait with a first buyer who is stumbling around financing or inspection issues. And if your offer happens to be higher, it could put pressure on the first buyer to move forward because he’s getting a good deal.

Backup buyers also should put a “right of first refusal” clause in their offers. That way, you’ll be first in line if the other deal fails, but you won’t be bound to move forward if your situation changes or other unforeseen issues come to light.

In some places, though, sellers have the right to accept backups right up to the day the first buyer closes. And should one of those backups be without any financing or inspection contingencies, the seller has the right to give the first buyer anywhere from 24 to 72 hours to remove the contingencies in his contract. If the buyer doesn’t, that contract becomes null and void and the seller can move on to yours.

Some realty pros advise against backup contracts because when the first contract fails, the value of house tends to decrease, at least technically. As a result, you could be locking yourself into a purchase price that is too high. At the same time, though, in many markets, values are marching higher every day -- so someone whose backup contract moves up to first could be getting a bargain.