Backup Offers

From time to time, a home buyer will ask us if he or she can write a backup offer on a home that is already in escrow. Usually, the house under contract is especially remarkable and/or well priced, and the buyer is hoping to reserve “second place” on the house in case the other buyer who is currently in escrow cannot or elects not to proceed with the purchase (after being declined for a loan, or discovering something during the inspection period the buyer isn’t comfortable with, etc.).

There are several pros and cons to writing backup offers on homes, which I will have to go over in another blog post, but for now, let’s discuss whether sellers can even accept them.

Can Home Sellers Accept Backup Offers?

Yes, but there are limitations to what traditional home sellers can do with their accepted backup offers. As of the writing of this post, Lines 363 – 364 of the Arizona Residential Resale Real Estate Purchase Contract clarify what those limitations are.

If you don’t happen to have your pocket purchase contract with you today, don’t worry, here is what those two all-important lines say.

Subsequent Offers: Buyer acknowledges that Seller has the right to accept subsequent offers until COE. Seller understands that any subsequent offer accepted by the Seller must be a backup offer contingent on the cancellation of this Contract.”

Sellers of short sales, on the other hand, are not restricted nearly as much. Here is what Lines 13 – 15 of the Arizona Short Sale Addendum say, as of the writing of this post.

“Nothing shall limit a Seller from accepting subsequent offers from subsequent buyer(s) and submitting the back-up contract(s) to Seller’s creditor(s) for consideration. All parties understand and agree that Seller’s creditor(s) may elect to allow the Seller to sell the Premises only to the holder of the Contract with terms and conditions most acceptable to creditor(s).”

Big difference between those two terms, isn’t it?

Can Home Sellers Use Backup Offers to Gazump a Less Desirable Offer?

That’s right, you’re going to learn a new word today, and the word is gazump. The first time I heard it used in a sentence (yesterday), I knew I had to find a way to work it in here somehow, so I did. I also digress…

You may want to read Wikipedia’s explanation of gazumping, but essentially, it refers to the act of accepting one offer from a prospective buyer, but later accepting a higher/better offer from a different buyer, leaving the original buyer high and dry and without a home.

I hear it’s a common fear, but the good news for Phoenix home buyers is that gazumping is more predominant in countries like Great Britain and Australia than it is in the United States. However, if a traditional home seller has a backup offer that is significantly higher/better than the offer that is currently in escrow, beware.

No, the seller can’t march down to the title company and cancel the current buyer’s contract. Jay Thompson of Thompson’s Realty did a great job of explaining why not. What the seller can do is refuse to make any non-warranted repairs (if asked during the Inspection Period), even if the repairs seem minor or inexpensive to address, hoping the buyer in escrow will cancel the contract, thus making way for the backup offer to slide into “first place.”

Although these kinds of practices aren’t common here in the Phoenix housing market, home buyers should try to find out if the sellers of their homes have any backup offers before submitting lengthy lists of non-warranted repairs and expecting the sellers to gladly correct them all. After all, knowledge is power.

If you would like to talk more about the pros and cons of writing backup offers, or about what a non-warranted repair is, please leave a comment below and let me know!

Image Credit: RichardBH on Flickr. CC Licensed.