Tuesday, March 14, 2023

Rethinking Backup Offers



Like with any professional, there are tools and techniques available to help with particular situations.  They might be more popular at certain times and might even be put aside or forgotten at others. For real estate professionals, one of those is the backup offer. 

In a situation where there are multiple offers, the seller can accept any offer for whatever reasons are important to them, leaving the makers of the other offers disappointed.  There is always some uncertainty that the buyers on a contract will close accordingly.  To hedge on that possibility, the seller may choose to make a counteroffer to one or more of the other offers to be a backup should the primary contract not close.

From a buyer's perspective, the purpose of a backup offer is to be next in line to have the chance to purchase the property should the first contract fall through. The benefit is that you'll be next in line to purchase the home without having to submit another offer and possibly, get into a bidding war.  It simply moves from the first backup to the primary contract position.

The buyer in the backup position also experiences uncertainty if it will work and possibly, feeling like they could be wasting their time while waiting to hear the outcome of the first contract.  Some of these buyers will continue to look at homes in the likelihood that another acceptable or better property becomes available.

Should this situation occur, the buyer in the backup position may or may not have the ability to withdraw from their contract.  It will depend on how the agreement is written.  It is important to understand the rights and limitations, as well as when they can be exercised.

A backup offer can lock you into a binding contract until the primary contract's buyer is approved and closed or until it fails to close and the backup buyer becomes the primary.  The backup may or may not have a unilateral way to withdraw the offer prior to one of these outcomes.

Considerations that need to be understood by sellers and buyers alike are:

  • Can a buyer in a backup contract unilaterally withdraw at any time?
  • Will the earnest money be deposited on a backup offer?
  • Will the timelines for contingencies like mortgage or inspections need to be made before becoming the primary contract?
  • Will there be any fees incurred by the backup buyer?

Sellers sometimes use a backup offer to apply leverage to the primary contract's buyer.  For instance, if the seller feels the buyers' demands on repairs are too high, the seller might say something like "if you're not willing to accept it 'as is', I have another buyer waiting to do so."

Many buyers, as well as their agents, don't want to obligate themselves to a back-up offer.  However, in certain situations, it is a good tool to have the opportunity to purchase a home that meets their needs.

In the highly competitive market experienced in 2021 and part of 2022, some buyers may have been reluctant to use a backup because of the slim possibility that it would become the primary.  With the shift in the market due to the interest rate increases, a backup offer could be a viable tool to get the home of your dreams.

Your real estate professional can help you understand the advantages and disadvantages of backup offers.  Recognizing that contracts are legal and binding agreements, you can also consult an attorney who can confer with your agent to understand the situation.  

Download our Buyers Guide

Tuesday, March 7, 2023

Playing Monopoly Is Good Homework



If you've ever been in a Monopoly game after most of the properties have been purchased and developed, it can be a relief to land on Free Parking, knowing the dice must rotate to the next player giving you a respite from paying rent.  Like the game, in real life, it would be nice to avoid paying rent and even better to have people paying you rent for property you own.

Winning in the game of Monopoly is all about investing.  If you travel around the board, trying to buy the ultimate property and pass Go to get another $200, you're missing the opportunity to purchase good properties along the way that could lead to upgrading into your dream home.

Starting early to buy your first home gives a buyer a chance to acquire a property with a minimum down payment, and inevitably, have a lower payment than paying rent for a similar home.  As the home appreciates and the loan amortizes, the equity grows.  Within a few years of average appreciation, the down payment can double or triple based on the leverage of using other people's money.

They could use the equity to stair-step their way into a larger home and finally, their dream home.  Or, if that homeowner's goal is to acquire rental properties, they could convert that home to a rental and buy another home on a low-down payment, owner-occupied mortgage to allow that property's equity to grow in the same way.

Multi-unit properties could be another option.  Finance it with the same type of owner-occupied, low down payment mortgage to achieve leverage that isn't available to non-owner-occupied investors; live in one unit and rent the others.  FHA, VA, and conventional mortgages allow for owner occupants to purchase up to a four-unit building with minimum down payments.

It is very impressive to see the portfolios of properties that some young people have built by focusing on their goals, living within their means, and not getting distracted along the way.  You can learn a lot from them but be careful about getting into a game of Monopoly with them; they know how to play the game.

Let's connect and talk about some of the specifics.