What Is a Backup Offer and How Does It Work?

A backup offer in real estate provides a strategic opportunity for both buyers and sellers when a property is already under contract. It serves as a formal agreement outlining the terms under which a secondary buyer would purchase the home if the primary transaction fails.

Understanding a Backup Offer

A backup offer is a formal contract submitted on a property that already has an accepted primary offer, functioning as a legally binding agreement that positions the backup buyer next in line if the initial deal collapses. The core characteristic of a backup offer is its contingent nature, meaning it only becomes active and enforceable if the primary contract is terminated. Like a standard offer, a backup offer includes key components such as the proposed purchase price, specified contingencies, and other terms. These contingencies often cover aspects like a satisfactory home inspection, the buyer securing financing, or the property appraising at or above the agreed-upon price. Sellers may still show the home and accept backup offers, especially if the primary offer has contingencies that need to be met.

How a Backup Offer Works

The process for a backup offer begins when a buyer submits a formal offer to the seller, drafted similarly to a primary purchase agreement but explicitly stating its status as a backup, contingent on the first deal not closing. If the seller accepts this backup offer, both parties sign a legally binding contract outlining the terms of the potential sale. The backup offer transitions into the primary contract only if the initial accepted offer falls through. Common reasons for a primary offer to fail include issues arising from a home inspection, the buyer’s financing falling through, or the property’s appraisal coming in lower than the agreed-upon price. Once the primary offer is officially terminated, the backup offer automatically moves into the primary position, and its terms become immediately binding.

Considerations for Buyers and Sellers

For buyers, making a backup offer can be a strategic move, particularly for a highly desired property, and it requires a commitment, often including an earnest money deposit typically ranging from 1% to 3% of the purchase price. This deposit is usually held in an escrow account. While in a backup position, buyers should understand that their earnest money is tied up, which might limit their ability to make primary offers on other properties. If the primary offer successfully closes, the backup buyer’s earnest money is returned, and they are released from the contract. Buyers should ensure their backup offer includes clear terms for withdrawal, especially if they find another property before their backup offer activates.

For sellers, accepting a backup offer provides a layer of security and can offer significant leverage during the primary contract’s contingency period. If the initial buyer attempts to renegotiate terms or requests excessive repairs, the seller can use the existence of a backup offer to encourage the primary buyer to proceed or risk losing the property. Having a backup in place also avoids the need to relist and remarket the property if the first deal collapses, saving time and effort. Sellers may even accept multiple backup offers, but clear communication with all parties is essential to manage expectations and avoid potential legal complications.