When should a back-up offer terminate?

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11/30/2016 | Author: Editorial Staff

My client wants to submit a back-up offer on a property that’s already under contract. I see that Paragraph B of the Addendum for Back-Up Contract (TAR 1909) is for the contingency date when the first contract has to terminate or else the back-up contract terminates. What date should I put here?

It depends on how long the back-up buyer wants to stay in the back-up position. Some back-up buyers may want to have their contract terminate within days if the first contract doesn't terminate early, while others may want to retain their back-up contract rights until after the last possible date that the first contract might close. If your client wants his back-up contract to last until or beyond the first contract's closing date, you can also ask the listing agent to provide the first contract's closing date. 

Categories: Legal
Tags: legal, legal faq, backup contract, backup offer


Comments

Rick DeVoss on 12/02/2016

Dealing with the provisions of a ‘back up’ contract seems to be a fairly complicated situation for the average real estate agent.  ~I strongly recommend consulting an attorney who is familiar with R.E. contracts prior to writing one.  (The attorney at the title company I like to use will provide the wording for Special Provisions at no charge.)

What document do we use to annotate the “amended effective date” of the back up contract?  ~The TREC Addendum says we are to use the date that notice is given.  But how do you prove when notice was given?  —Should that not be documented as an amendment to the contract?  (I would not want to rely on something as simple as an email to establish the effective date of a contract.  And how would the title company know what that date was?)

If “performance items” don’t start until the amended effective date of the back up contract, then Earnest Money would not have to be delivered until that date.  (Earnest money is a performance item.)  (See also Paragraph B of the Addendum.)

Is the delivery of the ‘option fee’ a performance item…?

I suggest you have your attorney write the appropriate language into Special Provisions, otherwise these tricky dates and their requirements may not be in the best interests of your buyer.

I would also suggest that TREC make an effort to clarify the terms of the addendum for back up contracts.

David Davis on 12/02/2016

Rick,

I’m directing this back to you specifically to collaborate a bit before sending something to the Broker-Lawyer Committee.  You’ve sparked a thought here.

While the “ADDENDUM FOR BACKUP CONTRACT” requires immediate payment of earnest money and/or option fee (through the language and operation of law in the actual purchase contract) (please folks, let’s not re-hash the debate about when these deposits have to be made, I used the word immediate above to get a point across). I think we need to have something that allows for a start date/time of the option period so that the option period does not begin to run until the backup offer is effective and that backup buyer is on notice that they are in/under CONTRACT.  I know some might say that this could go in Special Provisions but I really hate recommending the use of that paragraph to a Client.  It’s just too dangerous without having an Attorney on board.  It’s real easy to “un-write” a contract if you don’t know what you’re doing.  And when you’re talking about “time is of the essence” items such as an option period, this is just too risky (in my opinion) to start amending in Special Provisions without the help of an Attorney.

What are your thoughts on this?  Anyone else have any input on the subject?

Sonya Kennedy on 12/01/2016

Timing wise I agree with Editorial staff comments . Also regardless of the market,  listing agents should explain the importance of the back up offer to their sellers, and should negotiate back up offers as if its the only one on the table, because you never know.  As a listing agent,  I love to encourage buyers agents to submit back up offers.  That would give an extra comfort to my sellers knowing that there is something else to fall back on. . If I represent the buyer, then must explain the down side of the back up offer, buyer must understand that back up offer rarely becomes the first contract and remind them constantly not to get emotionally attached the property.  Debbie Russell   next time you should remind those agents that they should put extra effort to negotiate & work on your back up offer that if they care about protecting their clients best interest.  Just remind them to take a look at the MLS how many properties do come back to market.  You are doing the right thing when you go the extra mile to do the back up offer knowingly that may not go anywhere because you keep your clients best interest first.

Rick DeVoss on 12/01/2016

Help me out here:  I have not participated in a ‘back up’ offer recently.  Most of my buyers are anxious to move on to a house they have a better chance of getting on contract.

Why does the second buyer have to deposit ‘earnest money’ before the first contract is canceled…?  ~Since earnest money is Not required to have a contract anyway, shouldn’t we hold off sending earnest money to the title company until the second buyer is notified that he has the first position?

Why would you give the seller an Option Fee for a buyer who has no legal interest in the property until the first contract is terminated?  I can’t imagine that a buyer would want to pay for an inspection, so no option fee in needed until the clock starts running.

There would seem be no reason to “tie up” the buyer’s funds until he is given the unrestricted right to purchase the property.

Cathy Harris on 12/01/2016

It is market specific and client specific. I have written and had success with 2 backup offers in the last two years.  I just always make sure my buyer understand that earnest money and option fee are tied up while waiting.  In both my cases, the buyer was willing to remain as backup until the closing date of the primary buyer.  In both cases, we won the contract because the primary buyer’s financing fell thru.

Barry Buchanan on 12/01/2016

I agree with David. It is market specific. You win a few and you lose a few. But unless you are in the game, you can not win. Nothing ventured, nothing gained.

Debbie Russell on 12/01/2016

I’ve submitted about a half doze fully signed (by buyer) back up offers this past decade.  To some of what are considered to be “Top Agents”.... I’ve yet to have a seller negotiate or sign a back up offer.  Yes, the listing agents do presents the back up offer - in some sort of fashion I am sure; however seller response is always the same.  We will let you know if something goes wrong with the first offer.  These offers were always full price or above offers with pre-qual letters from good local mortgage lender’s, etc.  The Drawer seems to be the place for back up offers….

David Davis on 11/30/2016

While the Editorial Staff has the correct answer to the question here, this is going to be largely market specific.  The parties always control these terms, but the market drives the terms.  Is the market strong (seller friendly), or soft (buyer friendly)?


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