When inventory is low and there is a lot of competition in the housing market, it is not uncommon for buyers to submit competing offers on a particular listing. However, when a bidding war ensues and you lose your dream home to another buyer who has outbid you on terms or price, your agent should consider writing a backup offer.
A backup offer is a secondary offer made on a home that is already under contract. If for some reason the first deal should fall through, you will then have the option of moving from the secondary contract position into the primary contract position. For a home that everyone wants, there may be several backup offers. By getting your offer in first, you could be first in line after the primary sale falls through. In the Birmingham market, primary contracts on homes fall through about 19% of the time.
Once a primary contract is accepted and signed, that does not always mean that the sale of the home will actually occur. There are many different reasons why the first buyer can potentially pull out of the deal. Here are a few common real estate contingencies that can cause contracts to fall apart:
1. Inspection contingencies - There is a period of time, usually 10 – 14 days, that a buyer will have to investigate the condition of a property. During this time, the buyer has the opportunity to do a home inspection, sewer or septic inspection, roof inspection, termite inspection and more. During any of these inspections, should issues arise that cannot be worked out between the seller and the buyer, the buyer can terminate the contract.
2. Financing contingency – Unless a buyer is paying cash for a home, all other offers will be contingent on financing. One way to get a leg up on your competition is to get pre-approved for your mortgage loan with a mortgage lender. Getting pre-approved is especially important in a tight market. If your agent hasn’t worked to help you find a local qualified mortgage lender who will help you get pre-approved for a loan before you begin looking at homes, find a new agent.
The loan process can be challenging. There can be a myriad of reasons why a home loan will be denied, so find that information out before you stumble upon your dream home. If you don’t have a great agent, and you didn’t get pre-approved, keep in mind that it will typically take 21 days to get loan approval. Also, please keep in mind that there are a few circumstances that can throw up a red flag to your loan officer and cause your home loan to get denied, so do not do the following. Do not apply for a mortgage loan and then go out and make a large purchase such as buying a new boat, or car. Also, don’t change jobs, and if you lose your job, you will have to wait until you are working again to purchase a home.
3. Appraisal contingency – When there is an appraisal contingency (an appraisal will be required by a lender) and the home appraises for less than the price that was offered, well now you have a problem. The bank will only finance up to the appraised value, so if the seller doesn’t agree to come down to the appraised value, or the buyer doesn’t agree to pay the difference in cash, the deal unravels and the contract is null and void.
4. Cold Feet – Maybe the buyers made a hasty decision when the made their offer and now that they have had time to think through the purchase, they realize that it isn’t the right property for them. Maybe they haven’t budgeted properly, and they figure out that don’t have the money to do the remodel they want to do, or maybe another property hits the market that they like better, so they back out of the contract and simply walk away from the deal.
When writing a backup offer, buyers should expect to show up with serious offers at near or above asking price, and ideally with a pre-approval letter from a mortgage lender. Writing backup offers is an important strategy to be aware of when looking for real estate in tight markets where competition is high.