Can the Seller Accept Back-Up Offers Once Under Contract?

Can the Seller Accept Back-Up Offers Once Under Contract?

You bought a home, or at least you signed a purchase contract with the seller. Now you sit and wait for the entire process to complete. Does the seller have to completely ignore any other interest in their home? The ethical answer is that they probably should, but business is business. There is still a chance the offer could fall through, even if you are under contract. In this case, it is worth it to the seller to have a back-up offer so that they don’t have to go through the process of putting the home back on the market.

How a Back-Up Offer Works

A back-up offer, as the name suggests, is a second offer on the home. The potential buyer goes through the same process you went through to secure the bid. They have to negotiate bids, work out the details, and sign the contract. In many cases, they also have to put earnest money down to show the seriousness of their offer. Once the seller accepts the back-up offer and the escrow agent collects the earnest money, there is nothing else to do but wait. The seller cannot back out of the primary offer without good reason. Typically, there would be financial repercussions for doing so. As the buyer with the back-up offer, you have to wait to see if the sale goes through.

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Contingencies Affect the Contract

You might wonder just why a seller would need to accept a back-up offer. After all, they already accepted your offer on the home. Generally, however, sales contracts have contingencies on them. The type differs based on what the buyer needs. For example, if the buyer has a house to sell and they would not qualify for a new mortgage with the existing mortgage in place, they may have a housing contingency. Other contingencies a buyer may have include:

  • Financing contingency – They have until a certain date to secure financing
  • Inspection contingency – If the inspection comes back with something the buyer does not like, they have the right to back out of the contract
  • Appraisal contingency – If the value of the house does not meet the agreed upon purchase price, the buyer could back out

These contingencies give you the chance to back out of the contract and keep your earnest money. If you were to back out for any other reason, the seller has the right to keep their earnest money.

The Benefit of the Back-Up Offer

Sellers have an obvious benefit when they have a back-up offer – they do not have to put the house back on the market. If you walk out on the deal, the back-up buyer takes your place. Nothing needs to be done because the necessary parties already signed the contract and earnest money was already paid. The new buyer takes over where you left off and the process continues.

If the seller did not have a back-up offer and you walked, he would have to put the house back on the market. This takes time and resources, which could make it difficult for the seller, especially if they have a house to purchase too.

In some cases, a back-up offer also gives the original offer some insurance. When a current buyer learns that there is someone waiting in the wings to purchase the home from under them, they tend to act faster to close on the loan. This helps prevent any waffling from the original buyer who may otherwise look for a way out of the contract.

The Downside to Back-Up Offers

There is a downside to back-up offers for potential buyers, though. There are two ways the seller can handle these offers. One way is to accept the next best offer and make it official with a signed contract with the contingency that the original buyer backs out. Another way is for the seller to accept many different back-up offers. He cannot make these offers official, but he can hold them in the event that the current buyer backs out. This is a rare occurrence, but it can happen in a slow housing market. None of these offers are official and no one will know what happens next until if/when you back out on the purchase.

Staying Under Contract

The best way to ensure that you are not overtaken by a back-up offer is to ensure that you meet the requirements of the contract. If you have contingencies, make sure you act quickly. For example, an inspection contingency is only good for a specific period of time, typically 7 days from the day you sign the contract. If you fail to have the inspection during that time, your contingency ends. No matter what happens with the inspection after that point, you are still liable to purchase the home.

The same is true for any other contingency. However, the financing contingency is the one you need to worry about. If you don’t act quickly and you don’t secure a final approval by the required date in the contract, your offer could fall through. At that point, the seller could take the back-up offer because you will not meet the specified closing date. In order to prevent this from occurring, make sure you stay in close contact with your lender and provide him with any documents he requests right away. The longer you delay the process, the harder it is to meet the financing contingency date.

The long and short answer is that a seller can accept back-up offers even after you are under contract. Certain things have to fall in place in order for it to work out for the person with the back-up offer, but it does happen. It is not against the law for a seller to consider back-up offers as long as they don’t breach the contract they have with you. It is up to you to meet the contingencies and secure financing on time. The best way to stay ahead of the game is to secure a preapproval and start the processing of your loan as soon as you sign a contract. This way you can prevent any delays in financing and get the loan approval you need to close on the home.

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Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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