The Back-Up Offer--Part 2

The Back-Up Offer Part 1” Focused on Conditional Financing Transactions.

The first buyer, for one reason or another, is having difficulty obtaining the mortgage needed to proceed with the purchase. Here a back-up offer would include a condition that the seller be released from a previous offer within an agreed upon number of days.

Why a Release from this Agreement.

By releasing buyer 1, the seller and buyer 2 make sure that the first offer has been nullified, removing any possibility of a legal challenge from buyer 1.

What About When the Offer is Firm and Binding

There are situations where the buyer has removed all conditions in the offer, resulting in a firm and binding agreement. Yet the deal cannot close, usually for lack of funds. Here are some typical reasons why:

  • As the seller won’t extend the financing condition further, the buyer removes the condition without confirmation of mortgage approval. He now uses the time leading to closing to find a lender.
  • Prior to closing, the lender checks the buyer’s credit again, sees that the buyer has accumulated additional debt or downgraded his credit and refuses to advance the mortgage needed to close.
  • The lender approves the buyer and the buyer incorrectly removes his financing condition. The lender, however, has yet to approve the property. Now the appraisal reveals a value lower than the purchase price, a condition or location issue, or some trait that does not meet lender’s criteria.
  • The buyer made a cash offer—no conditions--to negotiate a lower price. Yet some or most of the needed money can’t be raised before closing.
  • For some reason the buyer is short of funds to cover the downpayment.

In all of these cases, the buyer cannot meet the upcoming closing.

The Seller is Legally Advised Not to Release

Usually the seller is legally advised not to release the buyer from his obligations to buy, to mitigate his loses by placing the home back on the market and to make a back-up offer conditional on the first offer not closing.

Once the closing date comes and goes, the back-up offer takes primary position and the property is sold to the 2nd buyer. Notice the first agreement was not released; that way the seller maintains the option to take legal action against buyer 1 for any losses.

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