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Back-up Offers Make Sense In a Low-Inventory Market

Written by on Monday, 10 December 2012 6:00 pm

In many parts of the country for-sale inventories have shrunk to historic lows. Buyers wanting to take advantage of remarkably low interest rates are frustrated by the dearth of available houses, especially at lower and mid-level price ranges. Well-priced properties that come on the market are frequently bid up over the asking price. And those "steals" in the REO and short-sale markets? Forget about it. How quickly - in many markets at least - things have changed.

In a market such as this it makes sense for buyers to consider making back-up offers on properties that may be under contract. This is especially true in the current environment, because tight lending standards (a.k.a. ridiculous underwriting requirements) seem to be causing a larger than usual number of fall outs. Also, even though there may not be so much in the way of short-sale "steals", there is still a considerable inventory of short-sales; and those have a way of falling out too.

When a back-up offer is made, and accepted, it is important that both parties know exactly what has been agreed to. Of course the agreement needs to be in writing. An attorney can draw one up, or, when available, a form may be used. The California Association of Realtors® (CAR) has produced a standard form that is useful in this regard. The Back-Up Offer Addendum (BUO) can be included with a purchase offer or a counter-offer. This back-up agreement specifies in which position it is in, for it is not unusual that there may be more than one. It is contingent on the written cancellation of the original offer and any other back-up offer(s) that may precede it.

The CAR back-up offer form specifically acknowledges that offers ahead of it may be modified. "Seller and other buyers may mutually agree to modify or amend the terms of Prior Contracts." So, for example, suppose that you were in back-up position number one, and that in the deal ahead of you, the buyer is not able to close on time. Such things happen. That fact would not, in itself, automatically trigger that the sale would move on to you. The seller could agree to extend the closing time to accommodate the original buyer.

Sometimes buyers are reluctant to be in back-up position, because they don't want to be out of the market while they are waiting to see if the deal ahead of them goes through. The CAR back-up agreement allows the buyer to keep shopping. "Buyer may cancel the Agreement in writing at any time before Seller provides Buyer Copies of written cancellations of Prior Contracts Signed by all parties to those contracts." The addendum also provides that a date may be specified beyond which either party may unilaterally cancel the back-up agreement.

The 'default' position of the CAR back-up addendum is that no check will be cashed or deposited, although that can be done if the parties agree. There is also a default position that time periods for investigations, contingencies, and closing will not begin to run until the buyer has received copies of signed cancellations of all previous agreements. However, "if the date for Close of Escrow is a specific calendar date, that date shall NOT be extended, unless agreed in writing by Buyer and Seller."

Being in back-up position is not ideal; but it can frequently lead to a desired outcome.

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  About the author, Bob Hunt

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.