Seven years ago I had a listing on a house under a construction stop order that was in litigation. (mistake #1 - never take a listing under litigation even if you think you know what you are doing.)

Buyer number one wrote an offer, that was not contingent on the resolution of the litigation. (i.e., he was given a tremendous discount in price because he represented that he was willing to assume the risk of the litigation going bad.

The agreed to price was lot value -minus the costs of demolition if it became neccessary. ($275,000)
Becasue the house was partially built the shell had cost maybe another $275,000 - So he's getting it for half price if the court rules the house can be built as planned (it eventually did)

So , after the half price offer was accepted, buyer number one says he won't close until the case is decided.

Seller didn't think that was fair because if he won his case he could sell the house incomplete for $550,000 or complete it for a couple hundred more and sell it for a million. If he lost and had to demolish he would still net $275,000. So the seller was only willing to allow the buyer the chance of a windfall profit not a guarantee.

So buyer #1 is given a notice to perform or quit. Along comes buyer #2. Buyer #2 writes an offer only $5,000 more than buyer #1 EXCEPT buyer number spells out the contingency. he won't close until the litigation is settled, either!

I explain to the seller that buyer #2, is not much of an improvement over buyer #1, - The only difference being a paltry $5,000 and the fact that #2 is forthright about the litigation contingency up front and not sneaking it in like buyer #1.

I strongly advised the seller to take the contract to the attorney he has on retainer.
Seller accepts #2, and boots #1.

Months go by, seller wins his case. We start moving forward. A couple days later the defendant files an appeal. Buyer #2 says my contingency says "final settlement" - I'm not closing until there is a decision on the appeal.

Seller flies into a rage. ( He's just won a half a million dollar settlement that he can't touch and he owns an uninhabitable house worth half a million that he has agreed to sell for half price and his buyer won't close yet) Seller wants to boot buyer #2, but the contingency is rock solid. More months go by until the appeal is settled.

Finally escrow closed on April Fools Day 2001, but not until after seller had threatened me with DRE discipline, trashed me to my broker, and threatened to sue me and my broker.

The fact that I had documented everything perfectly saved me from that fate.

That is the only case I had where the back up buyer got the first buyer booted and wound up with the property.

All the other situations where an original buyer fell out of escrow, the "back-up buyer" was not signed and accepted until the original buyer exited.

So. 1. I counsel against writing a formal back up when representing the buyer. (you guys already covered good reasons for that advise) and 2. I explain to sellers that a back up buyer can rescind at will until the first buyer exits, and that formally accepting the back up offer doesn't neccessarily put you in a better position that letting the would be backup buyer know that they"ll be the "first to know".

Sat Aug 18 2007, 15:50

Back up offers often push the #1 offer to close if there is an issue to be addressed. I would inform the agent my buyer has an interest, but I would put more energy into finding them another home asap. Buyers have this idea that the market is never going to move and wait. If they wait, they lose.

Sat Aug 18 2007, 15:43

I think it hurts the buyer customer, because it simply provides a negotiating tool for the seller. It places leverage in the hand of the seller to use on any post contract negotiations, including, but not limited to inspections.

That goes back to my positoin of ambiguity and poker. The seller does not know if my buyer will be there or not. One might argue that the ambiquity would encourage the seller to negotiate more with buyer #1 rather than risk the outcome of the unknown. It remains a judgement call. There is where I put my input and skill to work in my follow up with the lisitng agent. My conistent follow up on the current status keeps my buyer top of mind as an alternate without any commitment on the table.

Surely one could argue that my phone calls and follow up provide leverage to buyer #1. The seller remains concerned if my buyer might make an offer any day on an alternative property.

When you are buyer #2, the best you can do is reinforce the interest without commitment. It's not ideal, but being #2 in a winner take all situation is never good for number 2.

My only exception is when my buyer wants at any price and any terms. If my buyer throws all to the wind, and just "wants", then I may write the offer, because they want me to.

Sat Aug 18 2007, 14:48

I was actually expecting some dissent along the lines of, "you owe it to your client to position them so as not to lose out on their dream home twice." Since I have not been given the opportunity to counter the expected argument, I will debate with myself. I maintain that the best way to ensure that the first transaction does not fall out of escrow is to write a backup offer. I don't believe that you do a buyer any favors by locking up backup position on a property they covet because the first buyer now has even more reason to stay in line. Some comments touched on writing a backup for only those who really must have the property. My new question becomes, do you really think that solidifies the client's position, or does it actually hurt it? Bear in mind that I'm referring to a normal market, not a frenzied one in which there are too many buyers and not enough properties to go around (remember those times?)

Sat Aug 18 2007, 10:52

Paul,
If it's a consensus you were seeking, you are in luck. We all agree specifically for the reasons you yourself mentioned... I'd like to know if anyone has a differing opinion? And why?

Sat Aug 18 2007, 10:16

I personally do not like writing back up offers. I do not want my buyers tied to a deal that can keep them from making a purchase on another great deal that comes along. I prefer to create a dialog with the listing agent and let them know my client is interested should the current contract fall out of grace! There are times when it may be beneficial, if a client only wants that house, and is not looking to buy anything else. I have never run across that though!

Sat Aug 18 2007, 06:48

I agree with all the folks that answered so far and personally also do not like writing back up offers for all the reasons you listed. However, once in awhile a property comes along that my buyer absolutely wants and we find out that it's in escrow. In those instances, I will write a back up offer. They do work at times. :-)

Sat Aug 18 2007, 06:43

Well, well, well, Paul, you said it all! I will touch basis with the listing agent, and say my clients 'maybe' interested, and keep me informed, please. I will watch, but that's about it...

Fri Aug 17 2007, 23:39

There is so much inventory to choose from today most buyers do not want to hang around and wait. If it is the only property that fits the clients needs I usualy stay in touch with the listing agent.

Fri Aug 17 2007, 23:35

I'm with Deborah on this one. I stay in touch with the lisiting agent and make sure I'm the first call if something happens to the current buyer.

Fri Aug 17 2007, 22:39

I don't "write" back up offers. I do maintain contact with the listing agent, and in NJ, the attorney for the seller. I let them know that my buyer maintains interest. This does not bind my buyer and also leaves some ambiquity in the mind of the seller. If the original contract does fall apart, I will be notified. Yes, the seller can still use that as leverage with the buyer in any inspection negotations. It's a bit of a poker game, since nothing is in writing and the seller has no assurances.

Fri Aug 17 2007, 22:27