The Anatomy of a Back-Up Contract

Post written by Chuck Braxton, REALTOR® GRI, Roche Realty Group, Inc.

This article has been prepared for buyers and sellers of New Hampshire real estate to provide an overview of the back-up offer what it is, how it is used, and the benefits it can provide.

The Offer: In New Hampshire, making an offer for real estate is a one-step process. That is, the terms put forward to a seller by a buyer on a New Hampshire association of Realtors form entitled, Purchase & Sales Agreement (referred to as the “P&S”), if accepted without changes by the seller, becomes a binding contract on both parties.

The Counter Offer: If changes to the offer are made by either party, this is a “counter offer.” When either party makes a counter offer, then the other party is not bound by the terms of their prior offer unless such changes are accepted in writing by them. It is important to note that went both parties’ signatures are on a counter offer that is a binding contract. The changes on that counter offer and the other terms in the initial offer referenced in the counter offer are binding on the buyer and seller. The terms of counter offer and referenced offer may be merged in a so-called clean original that both parties then sign as part of the permanent record.

The Back-Up Offer and Back-Up Contract: A Back-Up Offer works this way. After a seller has accepted a P&S and entered into a contract with one buyer, another buyer (the “back-up buyer”) can make a so-called Back-Up Offer. A Back-Up Offer contains all of the desired terms (price, closing date, financing, inspections, etc.) the same as any P&S. However, there are a couple of additional clauses.

First, a Back-Up Offer contains specific language saying that the offer, once accepted by the seller, is in back-up position and, if the first contract fails for any reason, the seller and buyer agree that this back-up contract shall move into first position. Second, a Back-Up Contract may provide that the back-up buyer can withdraw from their contract for any reason and receive a full refund of deposit at any time prior to having the Back-Up Contract move into first position.

The Back-up Contract may also provide that the seller will have to notify the back-up buyer when their Back-Up Contract is about to move into first position. Once the seller has provided that notice, the backup buyer has a short period to acknowledge that the Back-Up Contract is in first position.

Although the seller and back-up buyer sign a P&S agreeing to the terms, the timeline starts when Back-Up Contract moves into first position based on notification by the seller acknowledged by the back-up buyer. Note that the Back-Up Contract is a binding, signed contract subject to the primary contract being declared null and void. The seller could accept more than one Back-Up Contract provided the sequence of Contracts becoming effective is clearly spelled out in each.

The Back-Up Contract: Once a back-up buyer and the seller agree to terms, the back-up buyer’s deposit is cashed and held in escrow. Prior to moving into first position, if so stated the back-up buyer can withdraw with deposit refunded. If the primary contract closes, the back-up buyer gets the deposit back, too.

Moving Into First Position: If the Back-Up Contract provides for seller notification and buyer acknowledgement, then when the primary contract falls apart, the back-up buyer has one more chance to walk away. In any case, once the Back-Up Contract moves into first position, then the terms of that contract take effect and that contract moves towards closing.

Considerations in Making into a Back-Up Offer: One reason to accept a Back-Up Offer is that the current market conditions tend to produce deals with greater uncertainty. The primary contract may be contingent on the sale of other property or have contingencies for inspections and financing. New regulations have tightened lenders’ criteria. A Back-Up Contract reduces seller’s risks.

Perhaps the best time to make a Back-Up Offer is shortly after a property goes under agreement (or ‘contingent’). Realistically, a Back-Up Offer is not a time for a buyer to expect a low-ball offer or weak financing to get serious consideration from a seller. However, for appropriately priced properties that the buyer feels represent good value, a Back-Up Offer near or above asking price may make sense as this is a low risk way to get access to a desirable property before it comes back onto the market. If you are considering making a Back-Up Offer, discuss specific alternatives for your situation with a REALTOR®.

About the Author: Chuck Braxton is a REALTOR® with the Meredith office of Roche Realty Group, Inc. He has applied his 25+ years of experience as a business executive to the challenges facing sellers and buyers of real estate in the Lakes & Mountains Region. His website is www.ChuckBraxton.com . Mr. Braxton may be reached at 603/677-2154 or toll-free at 800/926-5253 ext. 342 any time of day or evening, or by email at cbraxton@metrocast.net.