Backup Offers

Originally Published: 2/22/2012

Most short sale addenda have provisions for backup offers if you check the appropriate box. It is our opinion that, generally speaking, you should not check the box permitting backup offers when dealing with a short sale. It creates too many unnecessary legal and practical issues.

Most importantly, many lenders and their automated systems (such as Equator) will not allow two contracts to be under review simultaneously. As such, once a second contract is presented to the lender, the timeframes run anew with that second contract. Moreover we have found that the two buyers are not adequately counseled with respect to the implications of permitting two or more contracts, and it is our universal experience that one buyer will be very unhappy (sometimes to the point of legal threats) when all is said and done.  In other words, the buyer with the lower offer will obviously have an issue if a higher offer is subsequently submitted to the lender. As such, if the seller is going to entertain more than one contract, they had better do so very carefully, with proper legal counsel, and with adequate disclosure.

There are also significant legal considerations. For example, one needs to understand the difference between “backup” contracts and “multiple” contracts.  There is a significant legal distinction, a distinction that is important to understand when encouraging  more than one contract for the same property at the same time. A backup contract is just that, a contract that is clearly subordinate to a prior contract. It contains a backup contract addendum or similar verbiage that makes it clearly subject to a prior contract. If, however, two contracts are executed for the same property, and neither contains a backup contract addendum or similar verbiage, this is a multiple contract situation and potentially creates significant legal liability to not only the seller, but the realtors as well.  You cannot have two valid contracts for the same property without backup language in one of them.

As such, we strongly encourage any party who is considering the execution of more than one contract to consult with an attorney to determine (a) is it the best thing to do under the circumstances, (b) do they have the right to do so, (c) is the prior contract still in full force and effect, (d) if so, does it permit backup contracts, and (e) is adequate backup contract language contained within the second contract. Each of these decisions carry significant timing, factual and legal implications, and should not be taken lightly.

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