Does a Backup Offer Qualify as a Binding Agreement?

Backup offers are more common during a hot market.

When you shop for real estate and find property you really want, then discover that another buyer already has an accepted offer on the property, one option you have is to make a backup offer. Some sellers may refuse to consider backup offers, while others accept another buyer’s offer just in case the current deal falls through. How binding the backup offer is depends largely on the contingencies contained in the purchase contract and who signed the agreement.

Backup Offer

A backup offer is, in essence, an offer to purchase real estate that's currently under contract with another buyer. The intention of the offer is to allow you to purchase the property should the first deal fail to close. Like all purchase contracts, these offers may vary according to state law and by the terms and conditions specified within the contract.

Contracts

Contingencies are conditions that must occur before a contract becomes binding. For example, a contingency in an accepted backup contract might state the contract is only binding on the seller after the first offer dies. Contingencies normally include deadlines. For example, an inspection contingency generally gives the buyer a set amount of time to inspect the property; if he fails to cancel the offer during the inspection period due to an unsatisfactory inspection, the contract becomes binding, and he's obligated to purchase the property. During this time, the contract is still binding on the seller — he's obligated to sell the property should the buyer satisfy the contingency. If the seller never signed the backup offer, then the offer wouldn’t be binding on either party. For a contract to be binding, both the buyer and seller must sign the agreement.

Buyer

When making a purchase offer, the buyer typically specifies a date by which the offer becomes void if the seller doesn't sign and accept the offer. After that point, the buyer withdraws the offer and is under no obligation to purchase the property. In a backup offer, the verbiage might be different than that in a regular offer, leaving the offer open for an indefinite time, yet giving the buyer the option to withdraw the offer at any time. The buyer’s ability to withdraw the counteroffer ends when the seller signs, accepts and returns the offer to the buyer.

Seller

A seller may collect backup offers but not sign any of them, so he isn't under any obligation to sell the property if the first deal falls apart. He might even decide to increase the price or take the property off of the market. If the seller signs a backup offer, formally accepting a buyer’s offer, he's obligated to sell the property to the buyer under the terms of the contract should the prior buyer fail to purchase the property.

References

• "Modern Real Estate Practice"; Fillmore Galaty, et al.; 2006