You love the house, but just found out it’s already under contract. What can you do? Time to think about submitting a backup offer. In Texas, we have the Addendum for “Back-Up” Contract that helps us write up an offer that can be signed off on and secures the buyer a second place position to purchase the home. While no one likes to play second fiddle, the backup offer (which becomes a backup contract once all parties sign off on it) secures the second set of buyers the home should the first contract terminate. Backup offers are often used in hot markets when homes are flying off the shelves and also when we see a lot of homes being bought contingent on the sale of another home. Let’s dissect the Addendum for “Back-Up” Contract and see how it works.
Addendum for “Back-Up” Contract
A. The contract to which this Addendum is attached (the Back-Up Contract) is binding upon execution by the parties, and the earnest money and any Option Fee must be paid as provided in the Back-Up Contract. The Back-Up Contract is contingent upon the termination of a previous contract (the First Contract) dated _______________ , ____ , for the sale of Property. Except as provided by this Addendum, neither party is required to perform under the Back-Up Contract while it is contingent upon the termination of the First Contract.
Section A starts off starts off as a sort of preamble to the addendum, explaining what it is that the form is doing. This section sets up the backup offer to become a backup contract. If all parties sign off on the contract along with this addendum, it becomes a legally binding contract to purchase the home, just like any other contract, except it puts in the requirement that second contract (the backup) becomes contingent on the termination of the first. The last sentence effectively places on hold all performance requirements of the contract (except those mentioned here in the addendum), until the first contract terminates.
It is important to note, that while the contract is effectively put on hold by this addendum, the contract is still considered to be executed on the date of the contract (ie now rather than later) and is a real, legally binding contract. Many people think of it as a “handshake” deal, but this is dangerous thinking. As a buyer, you are legally obligated to buy the house now and the seller is legally obligated to sell it to you as long as the conditions set forth in the addendum occur, and there is no walking away just because you found something better.
Earnest money and the option fee are both paid as usual and the contract is to be submitted to the title company (not held onto in a drawer somewhere – yes agents, we’re looking at you!). The buyer effectively begins their option period (if they elected to have one) – we’ll discuss that a bit more in depth below.
B. If the First Contract does not terminate on or before _______________ , ____ ,the Back-Up Contract terminates and the earnest money will be refunded to Buyer. Seller must notify Buyer immediately of the termination of the First Contract. For purposes of performance,the effective date of the Back-Up Contract changes to the date Buyer receives notice of termination of the First Contract (Amended Effective Date).
The backup offer is now a backup contract and this section puts a clause into place that requires the first contract to either terminate on or before the date listed or the backup contract will terminate. It requires the earnest money to be refunded to the (backup) buyer if it is terminated. The option fee is not refunded as the buyer paid for the right to terminate the contract – not for the act of terminating itself. Logically, the seller must let the buyer know immediately about the termination of the original contract, as it affects when the backup contract moves into the first position and becomes the “active” contract.
Most importantly, the effective date (which is written on Page 8 on the 1-4 Family Residential Contract and is the date when all parties agree to the terms of an offer, sign off on it, and effectively turn it into a contract), is amended to be the date that the backup buyer receives notice of the first contract’s termination. We often describe the effective date as the start of the clock. The minute a contract is signed off on and executed, all timelines are based on that effective date. With the backup contract, you have an effective date on the contract, but it is reset once the contract loses its backup status and moves into the primary position, essentially restarting the clock.
C. An amendment or modification of the First Contract will not terminate the First Contract.
This is pretty simple – if the first contract is modified or amended, it does not terminate it. That contract can be modified or amended as much as needed during the course of its life. This section makes this item clear to all parties so there is no room for disputes later.
D. If Buyer has the unrestricted right to terminate the Back-Up Contract, the time for giving notice of termination begins on the effective date of the Back-Up Contract, continues after the Amended Effective Date and ends upon the expiration of Buyer’s unrestricted right to terminate the Back-Up Contract.
This is a big one. The option period has a timeline (determined by the contract – it is a negotiable amount of time) and it is based on the effective date. However, when in the backup position, all performance items are effectively frozen in time (see Section A.) and the option period is no different. While in a backup contract, if the buyer has paid for an option period and the unrestricted right to terminate, that option period is in effect from the day the backup offer is executed and turned into a backup contract and continues through the time they are in the backup position. Once the first contract is terminated and the backup contract becomes the primary contract, the effective date is amended (see Section B.) and the timeline for the option period is reset to work from that amended effective date. This gives the buyer a much longer option period and allows them to restart their option period once they become the contract in play.
E. For purposes of this Addendum, time is of the essence. Strict compliance with the times for performance stated herein is required.
Like all real estate items that have timelines based on the effective date and performance items, time is of the essence. This statement serves to notify all parties that there is a ticking clock and that certain items are based on performance within specific timelines – failure to perform those items in time could have legal consequences. This is a common notification on real estate contracts as many items in the contract must be performed in time in order to avoid negative consequences.
A Few Notes About Backup Offers
- Can I make a backup offer if there is already a backup contract in place? No. Only one backup contract is possible at any given time.
- Should I conduct inspections while in the backup position? No. As the option period timeline resets once the effective date is amended and you are placed in the primary position, you will still have the normal timeline (as negotiated in your contract) to perform inspections.
- Where do I get the effective date of the first contract to put in Section A. of the addendum? The listing agent can provide this to you. Do not leave this blank.
- What date goes into Section B. determining how long the backup contract is in effect? This date is up to buyers and can be negotiated by both parties. It functions as a statement of how long the buyer is willing to wait to find out if they are “getting the house” or not.
- The backup contract doesn’t need to be submitted to title, right? Wrong. The backup contract, along with the earnest money, should be submitted to title just like any other contract. It is not something to be “held onto” for later. The seller should also be given the option fee and the check should be deposited by the seller. It is theirs to keep (the buyer is paying for the right to terminate, not the act of termination itself.
image courtesy of Son Of Groucho