In today’s hot market, properties are going fast, sometimes, within a few hours! This can make it very difficult for investors to find a property, run the numbers to determine if it’s a good deal, secure financing, and make an offer before the house is already under contract. While this fast-paced environment is just the reality of the current market (and frankly, doesn’t seem to be changing any time soon) we’ve seen relative success from our borrowers in the strategy of making a backup offer.
Broken down very simply, a backup offer essentially means that if a property is pending, other buyers can make offers just in case something falls through with the current contract. This could be a good option in a market where offers are made quickly, perhaps without due diligence. It could also be a good option since many sellers feel so comfortable with the state of the market that they decline buyers who are ‘demanding’ or who require certain contingencies. Below, we have broken down some of the good, the bad, and the ugly of backup offers.
Let’s start with the Good…
As mentioned above, backup offers are one strategy that allows investors to keep up with the fast-paced market. If a property seems to be a good fit, it makes sense to make an offer even if it’s under contract, because you never know what can happen in the days leading up to closing.
A buyer’s financing can fall through, there can be a disagreement about inspections or appraisals, and you can be perfectly positioned to capitalize on this. If an existing contract falls through and a backup offer is in place and acceptable, then you are automatically under contract with the seller. This allows you to avoid having to go through another round of competition if the seller decides to put the property back on the market.
If you think about it, putting in a backup offer is really a win-win scenario. You don’t lose anything if the current contract goes through, and sellers often don’t want to go through the hassle of relisting, so having a backup offer is attractive in that sense. It also gives the Seller some leverage to change their minds and terminate the existing contract, if they prefer to take your offer.
Now let’s talk a bit about the Bad…
If you do make the decision to put in a backup offer it’s important to think it through. Making an offer that has many contingencies or is below the asking price (especially in a hot market) is not going to get the attention you are hoping for. It might just be worth it to the seller to relist if they believe they can get a better deal.
If you are considering this option, it is so important to make a strong offer. You want to put your best foot forward and give the seller a reason to choose you, remember, you’re looking for that win-win scenario!
Here are when things can get Ugly…
One of the biggest downsides that we’ve seen with folks putting in backup offers is when they lack patience. With a backup offer, you’re taking a chance on the existing contract falling through so that your offer takes its place. If you are not patient and put in many offers, or many backup offers for that matter, you might just get yourself into a tricky situation.
Making sure you are not stretching yourself and your financing too thin is so important. Real estate investing is all about relationships. You don’t want to put yourself in a position where you cannot uphold your end of the contract and must withdraw from properties because you are tied up in backup offers. This can be a very difficult and yes ugly situation so making sure you have the patience to wait it out is so key!
Overall, backup offers can be a great strategy, especially in a hot, fast-paced market like the one we are experiencing at the time of this writing. But it’s important to make a strong and attractive offer and have patience during the whole process so as not to take on more than you can handle (or afford).
At CPL, we coach and advise our borrowers to take advantage of these types of opportunities without going too far. We are here to help guide you through the process of finding deals in this tough market and when appropriate making backup offers that might just get you the deal you’ve been dreaming of! Reach out today if you have questions about backup offers or are in need of adding a local lender to your team!