Back up offers when selling or buying a home

What is a backup offer

A backup offer is when a has seller accepted an offer on the home, but accepts a second offer as a backup, just in case the first offer falls through.

This is generally good news for the seller, because if the first offer falls through on financing or home inspection, the backup offer automatically falls into place. The seller does not need to start over marketing the home.

How a backup offer works

The backup offer is negotiated out the same as the first offer. The only difference is that the second offer has a special condition. This is a seller’s condition and says that the second offer only becomes valid if the first offer falls through. This condition must be written correctly. Otherwise, the seller would be selling his home twice.

The benefits of a backup offer for the seller

The seller benefits from this backup offer because the certainty of selling the home has just doubled. If the first offer falls through, the seller has a completed and signed contract with the next buyer. The seller does not have to worry about further showings.

A backup offer gives a seller some leverage

There is always a chance that an issue comes out of the home inspection. Sometimes, buyers use this to re-negotiate the purchase price. A seller may have some leverage on this re-negotiation with a backup offer in place.

However, a seller must be realistic when this happens. The decision on whether to re-negotiate or not usually depends on the actual issue. This is because the buyers from the backup offer will also do a home inspection, and the outcome might bring the same issue to light. So, sometimes it is smarter to finish the re-negotiations with the first set of buyers.

The seller cannot do much when the conditional sale falls through on financing.

Sometimes, a backup offer is better than the first offer

Usually, if a buyer wants to be ‘a backup’ s/he must bring a good offer to the table to convince the seller. Most sellers would like the offer to be just as good, or better. A higher price, with fewer conditions or a quicker possession can make an offer better.

The disadvantage of a backup offer for a seller

Fulfilling conditions take, on average, between 7 to 10 business days in Calgary. During this time, the property may have had more viewings and perhaps created more interest. If the seller has a backup offer in place, the seller conditionally sells the property ‘automatically’ to the next buyer. Without a backup offer in place, the seller can choose to put the home back onto the open market and let supply and demand do its work.

Most sellers take the option of the backup offer. After all, it is the most secure option and gives the seller peace of mind. And, in our experience, that is most often the best choice. There is a saying in Dutch that translates to ‘Better one bird in the hand, than 10 in the air’. That is precisely applicable to this situation.

How to decide on accepting a backup offer

The decision to accept a backup offer depends a lot on the current market and the popularity of the home. If there is a lot of interest in the first week, and this interest keeps growing, it could be a valid reason to not accept a backup offer.

Can a seller improve the chance of a backup offer?

Keeping the property active on the MLS provides the best opportunity to receive a backup offer. Keeping it active on the MLS means that the seller must allow showings. This is simply a stated rule by the Calgary Real Estate Board. Not all sellers may wish to keep showing their home because it may be an inconvenience.

Sometimes, realtors mention in private remarks to other realtors that the property is conditionally sold. In our opinion, this is not smart.  Because now the chance of showings is reduced drastically. Many buyers and some realtors will not want to view a property that is already conditionally sold. These viewings are, in our opinion, all missed opportunities to get a backup offer.

The benefits of a backup offer for the buyer

If it is a buyer’s dream home, it may be very well worth it to negotiate a backup offer. The backup offer becomes valid immediately when the first buyer decides not to waive his/her conditions.  The seller does not get the opportunity to place the home back on the market and showcase it to new buyers again. In Calgary, the percentage of conditional sales falling through is not very high, but it absolutely happens!

Increase the possibility to get the home you want

Many sellers expect a backup offer at least or just as good as the first offer. So buyers need to submit an attractive offer. An attractive offer usually translates into a higher price. However, fewer conditions or a more favorable possession can make an offer more attractive to a seller as well.

One downfall is that a buyer will never know what the first offer looked like. During the condition days, the seller cannot sell the home to anyone else. However, the seller can accept a backup offer.

The disadvantages of a backup offer for a buyer

A seller often expects a backup offer to be at least just as good as, or better than, the first offer.  Now, a buyer may pay slightly more than anticipated. A buyer giving up on a home inspection condition to make the offer more attractive is often at a high risk, or at least in a very uncomfortable position.

The buyer is ‘locked into’ a contract

A buyer is locked into a backup offer until the first offer falls through or goes firm. In Calgary, conditions usually take between 7 to 10 business days. Should a ‘dreamier’ home come along, the buyer cannot get out of this backup contract.

Also, the deposit could be locked in if it were already submitted.

An offer can fall through on financing, home inspection, or in the case of a condo the condo document review. An offer falling through on the home inspection or the condo document review may contain the same issue(s) for the next buyer.

Conditions, waiving and non-waiving explained

Most buyers ask for several conditions when buying a home, and most sellers expect and accept these conditions. Financing and a home inspection are the most common conditions. A condominium document review is also a very common condition if the property is a condo.

The buyer gets some time to fulfill these conditions. In Calgary, this is usually between 7 to 10 business days. However, that can be negotiated between seller and buyer. Once the buyer is satisfied with the home inspection, and the bank has approved the mortgage, the buyer removes these conditions to make the sale firm. The contracts used in Calgary use ‘waiving conditions’ instead of removing conditions.

If the buyer cannot fulfill a condition, the buyer does not remove (or waive) this condition. That means that the contract falls through. There is no more contract to purchase, and the buyer ‘walks away’ from the home.

During the condition days, the seller cannot sell the home to anyone else. However, the seller can accept a backup offer. In this contract, the seller adds a condition, in the line of “this contract only becomes valid if the first contract falls through”. When that happens, the backup offer comes into place automatically, and the second buyer can start fulfilling these conditions.

When is an offer in real estate valid?

A contract to buy real estate is only valid when both buyer(s) and seller(s) have all their initials and signatures on the documents. This includes an initial next to every change that was written on the contract during the negotiations. If buyer and seller go back and forth often during negotiations on price, conditions, terms, and possession date, and all these changes are written on the contract, they all require initials for validation.

In Alberta, every agreement, given verbally or with a handshake is ‘in principal’ binding, with the exception of real estate. The purchase of real estate must be in writing to make it valid.

Electronic signing is now most popular in real estate. Negotiations are often done verbally. Once buyer and seller agree on all points, the signatures and initials validate the contract.