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Back Up Offers?

We have a saying, “What you saw today and want to think about tonight, someone saw yesterday and thought about last night.” Murphy’s Law says that a property that has been on the market for months will have two parties suddenly interested in the property the same day.

The seller can only accept one offer so the other offer is often countered into back-up position. That means if the first sale fails, the other offer moves into first position and the property never goes back on the open market. The buyer can back out at any point prior to being notified that they are in first position. Once in first position, the normal terms of the earnest money agreement would apply.

On the buyer side of a transaction, I am not a fan of back up offers. Mainly because I think it strengthens the seller’s position with both potential buyers.

Back up offers are generally great for a seller. With a backup offer, the seller is usually less negotiable on repairs or concessions: “You don’t take it, I have someone else that will.” This means that the buyer in first position, knowing there is a back up offer, has less clout and is likely to accept less than they might have been able to get out of the seller as they are essentially still competing for the property. In MY opinion, the back up offer makes the first deal less likely to fail. If the first deal falls apart, the property will come back on the market and the buyer can make an offer at that time.

The advantage to the buyer in back up position is that if the deal does fail, they know exactly what terms they are going in with and it is an accepted offer then and there.

23 Comments on “Back Up Offers?

  1. Unless one has been living in a cave for the past month or so, they’d realize that homesellers getting AN offer much less multiples is getting increasingly challenging.

    I am amazed at the number of For Sale signs in Portland, even more amazed at the number with Price Reduced or New Price stickers on them. Nearly all of them.

    I would advise buyers to wait until the market drops the 40% it’s bound to drop or if they can’t wait, give very very low offers.

  2. My wife and I both 28, sold our home we had owned for the past 3 years in Sacramento and moved to Portland just under 9 months ago. In June 2007 we bought a house in West Beaverton near the Murray Hill area and the house received multiple bids the same day we put in an offer. Fortunately the seller took our offer and the deal was done. I spoke to my realtor and the comment by Naysayer is right, multiple bids are still occurring, but less frequently. Give the market a year or two and the multiple bid frenzy will be back.

  3. I agree with both comments above (except Naysay’s 40% market crash). We’ve seen fewer multiple offer situations but the option to make a back up offer is still there for if somebody beats the buyer to making the offer. You can write a back up offer on any pending listing. Seller doesn’t have to accept it but you can write it.

  4. What adding a clause to your offer that disallows backup offers? It would need monetary damages to have any teeth (since walking away doesn’t help in this situation). Not sure how it would work, but maybe something that should be added to the savvy realtor’s standard offer template.

  5. I think you meant to say “What about…” I can see where you are going but your messing with contract law at this point as it is out of the norm.

    Two equal offers: one has that verbiage and the other doesn’t. Which one would you tell your seller to accept?

  6. Give the market a year or two and the multiple bid frenzy will be back.

    Ummm… Have you been paying attention? OK, you do say ‘or two’. I’d give make it more like four years… but even then it’s iffy.

    I would advise buyers to wait until the market drops the 40%

    Now, naysayer, 40% might be going a bit far. How about 30%?

    Charles: Seeing any deals fall through lately where the buyer was all approved and then … ooops, gotta reapply somewhere else?

  7. I believe the stage some of you are at is called “bargaining”. For a long time we heard “denial” from the same people. “If won’t happen in Portland, we have the urban growth boundary.” “There’s so many people moving here our real estate will never suffer a correction.” (Tell that to anyplace-in-Florida or Phoenix, two places with an in-migration rate much higher than ours whose markets are hitting the proverbial skids.)

    Naysayer: This is a good point. The fact is that in places like Phoenix and San Diego a year or so ago they were also saying “But it’ll never happen here” In those cases it was something like “But it’ll never happen here because everybody wants to move here for the sunshine” (Phoenix) or “Prices won’t fall because most people want to be within 10 miles of the ocean for the moderating climatic effects”[kind of like a natural UGB] (San Diego).

    Fact is that most people live somewhere because they like it pretty well, otherwise they’d move. And that means they think that their place is somehow special in a way that exempts them from the downturn. It’s human nature to view the area where you live this way. The reality is that in the current Credit Crunch everyplace is vulnerable.

    Now, of course there are exceptions like Detroit where everyone is trying to run for the exits all at once, but that’s an unusual case made worse by the fact that the US auto industry is dying and it’s mostly based there.

  8. Multiple offers happen when a property is priced far below far market value so the number of immediate willing buyers is greater than one. If a home were priced very low, say $1 (one US dollar), then there would be hundreds of offers by the end of the day.

    My question: Would the existence of 50 backup offers change the bargining strength of the buyer or seller? I suggest not. A buyer has a certain value to a property–he is only willing to pay so much. If extra issues, such as inspection issues, push the price too high, who cares how many backup buyers exist. This assumes that the buyers act independently of each other.

    There are people who believe, and maybe rightly so, that once a home is no longer available, then it is worth more, as a willing buyer signals that there is value. This is the so-called “auction phychology” where each bidder figures it is worth more because of the very existance of the other bider. This breaks down at some point, and I suggest that point is at the buyer’s true and actual value if he were acting independently.

    If a seller wants multiple offers right away, take a “reasonable” price, and cut it an extra 10 to 20 percent. In the end, it all comes down to price.

  9. I believe the stage some of you are at is called “bargaining”. For a long time we heard “denial” from the same people. “If won’t happen in Portland, we have the urban growth boundary.” “There’s so many people moving here our real estate will never suffer a correction.” (Tell that to anyplace-in-Florida or Phoenix, two places with an in-migration rate much higher than ours whose markets are hitting the proverbial skids.)

    Then we saw “anger”. The messengers such as myself being chided about “sour grapes”, “missed the boat”, etc etc by people who didn’t want to hear that Santa Claus was in a coma.

    So now we’re at bargaining. “Ok, I can deal with a downturn but then it’ll pick up in two years, right?” “The market will correct a bit and then in- Fall 08, Spring 09, yada yada (keeps being pushed farther out)- it’ll be back to 20% annual appreciation!”

    Good luck with that.

  10. Under the $1 scenario, you’re probably right except for the one factor you can’t measure: emotion. I want what everyone else can’t have and this brings in supply and demand.

    A seller is not obligated to accept a $1M dollar on a $1 listing price so hopefully their agent would tell them to stand back and reassess.

  11. And yes, TiP, we have seen banks our clients are using close. We haven’t had a deal fail yet because of it. Probably a matter of time.

  12. “I want what everyone else can’t have and this brings in supply and demand.”

    The buyer must be both willing and able. A willing but unable buyer is a no-go. In other words, there are buyers who ‘want’ everything, but do not have the resources necessary to complete a transaction.

    Also not all buyers are willing, at a given price. You make it sound like prices just keep climbing, but that breaks down at an equilibrium point. At the point of breakdown, fair market value is established.

    “A seller is not obligated to accept a $1M dollar on a $1 listing price so hopefully their agent would tell them to stand back and reassess.”

    Are you suggesting that a seller should not take the highest offer, all things being equal?

    I also note that I use $1 to represent a very small number. In most cases the number could be $10,000, $50,000 or even $100,000. The point is that the property is priced at a point where the immediate number of willing and able buyers is much greater than one.

    On the other end, let’s price a Portland home at $100,000,000 (that would by far be the highest priced place in this area by your own data), and it may take 1,000,000 years to find the right buyer. The only reason there would be competing offers is because the offers being made are far below the ‘asking price.’ No buyer would offer more on a place that is clearly overpriced. By the way, if you know of any place that would actually have near instant offers at $100,000,000, just add a few zeros.

    If you really want to make things interesting, let’s talk about buying mineral rights, where the number of buyers is relatively small, and the valuation of the land is based on a large degree of risk. It is often the case that a given bidder will represent an expert opinion about the property. In other words, if I am known to have a good track record, and you are not so sure about the property, and I am bidding, you can take that as a signal of the quality of the property. In fact, if you did not think I would bid, because you thought the quality was lower than my bidding standard, then you will more than likely consider the property to be better than your original analysis. This sort of play requires a very small number of buyers who have past knowledge about each other. The field of buyers in most real estate transactions is large and unorganized. The average buyer keeps a place for 5 years, thus the cycle is fairly long, and every month the mix of buyers changes.

    Yes, there are a few properties on the high end that may only have a few buyers, and that field does not change much in time.

    The bottom line is that the number of buyers at a top selling price is very small, and these buyers are not simply willing to pay more for what they cannot have. If buyers were willing to spend more for ‘something they cannot have,’ then why would any seller accept an offer? Sellers would just wait for buyers to come back with the bigger, better offers…

  13. Hi all, sorry to be off topic – I’m wondering what you think of smaller Oregon towns like Albany. Specifically, smaller carefully refurbed houses near larger developments. The developments are starting to lower their prices.

    We are trying to determine if the housing market will stay strong enough to sell next year or if we would be better off to sell immediately. We have our current house to rehab so we were planning on moving into the Albany house while fixing it but we’re nervous about the housing market. This is simply a case of boyfriend/girlfriend each having a house but neither were suitable for actually living in. Fortunately the boyfriend knows his stuff and the inspectors are happy with his work.

    Do buyers understand differences in quality when they go looking?

    For instance, can they tell the difference between larger box houses with kflex plumbing, 14 gauge underwiring (versus 12 gauge), vinyl, and carpet.

    Versus

    Rehabbing an older 1940s packed with new insulation, windows, bamboo flooring & tile with large instant on gas water and efficient furnace.

    Any thoughts would be helpful. If you are interested in seeing the house – http://kathyandcalvin.com/image/tid/6

  14. Dickey45-

    I suggest doing some market research and risk analysis. If you want to gain a much better understanding of both market research as well as risk analysis, then I’d suggest taking some additional business classes. To earn an MBA you will need to complete some work in accounting, marketing, economics, statistics, and finance. Since you are looking at construction, Project Management lends itself well to that area.

    If you can figure out a way to make your project risk-free, let me know, as I have plenty of investors ready for risk-free returns. I would suggest, however, that you take a look at the history of LTCM before you try and sell anything on a risk-free basis.

    Finally, I suggest that you develop a written plan, complete with finance, marketing, risk analysis, milestones (Stage Gate work good for this), and so on. If you actually had a plan, then you would know what quality of wiring to use, for example. Also, if you did some market research, then you would have a better understanding of the consumer behavior in the “smaller Oregon towns.”

    -JP

    P.S. I really be interested to see if your ‘boyfriend’ actually adds economic value to the project. I once ran the numbers for a friend. I suggested he was working for about $2.00 per hour. I was wrong, after he sold the property, he said a closer estimate was $1.65. In any event, just passing a government inspection doesn’t suggest much, at least from my perspective.

  15. We are trying to determine if the housing market will stay strong enough to sell next year or if we would be better off to sell immediately.

    Well, first off Dickey45, I’ve been labeled an ‘alarmist’ here, though in my defense, I don’t think I’m quite as negative as naysayer (though as I look at what’s going on in the credit markets in recent days I’m moving more in that direction)… anyway, I preface with that just so you know where I’m coming from. Oh, BTW: I think my track record has been pretty good if you go back several months and look at posts I did then about tightening lending standards and the inevitable effects on the market…

    So here goes: I think any ‘strength’ you perceive in the housing market is ‘in the rear-view mirror’ as they say. It’s historical at this point. Lending standards tightened considerably in July especially in the wake of the BearStearns debacle. Now many programs are either gone or have much stricter requirements for FICO and downpayment, etc. I think that you’ll find that August’s numbers are falling off the cliff as we speak. The GSEs (Fannie Mae) got the news last night that they would not be allowed by their gov’mt regulator to take on more toxic mortgage debt – something that the big mortgage lenders were hoping for (they wanted someone to unload all that toxic waste on). So the mortgage lenders won’t be saved by Fannie Mae.

    You are correct to be nervous about the housing market at this point. Bottom line is that a lot of people who could qualify for a home loan at the beginning of the year cannot qualify now. Less buyers + lots of inventory = falling prices. It’s econ 101.

    Also, I’m not sure about Albany, but I know that prices in Southern Oregon did run up quite a lot especially when compared to local incomes there (not a lot of high paying jobs in So. OR). Now that the CA market is even more dead due to the squeeze on Jumbos (loans over $417K) you won’t see the equity locusts migrating up here to keep those prices up. The thing to ask yourself is this: Where do most people in Albany get their income? Has it been coming from a lot of home building activity lately? If so, look for those incomes to fall quite a lot. No income, no way to afford to buy.

    I would guess that it might be better to sell now than it will be next year just by virtue of the fact that the overall economy could be very negatively impacted by the current events moving through the credit markets (and there’s some delay between those kind of events and job losses)… but the bad news I give you now is that basically the train has already left the station.

  16. TiP-

    It is difficult to give advice when the other person is asking about a specific property. I do agree, however, that the real estate market is not in good shape, and there now are hundreds of news articles suggesting the same.

    Dickey45 really needs to develop a strategy. If they think the market is going up sufficiently, then hold. If prices are going up, but not enough to produce a positive ROI given a reasonable discount rate, then it is time to sell.

    I shift my money to match the economic conditions. I know there are others who subscribe to the “hold for the long-term.” I don’t suggest that strategy, as I have seen too many people hold a stock until the price hits zero. This happens with homes too. People will hold out for a better price, and in a down market, the value keeps falling–sometimes faster than the asking price reductions.

    Given the option between cash or real estate, today I would pick cash.

  17. I think if we ask between $140 and $160 for the house & property (1/2 acre near I5), he will make $80-$100k. He has put waaaay too many hours into it – but between watching TV and working on your house, I think it makes a nice activity. Without the work, the place wouldn’t have been worth $100k – it was literally a dump.

    My hope is that people look at real estate in an educated fashion. The homes down the street were built in the rain, with shoddy workmanship, built up foundations that will likely crack, and poor quality siding and other materials. We took our time and upgraded everything. Not sure if home buyers would believe that, nor would they believe that we care. I took lots of pictures along the way to document the changes and the materials we used but I wonder how many buyers give a rip.

    I do. I insist on a 50 year construction quality. Will the building a components last 50 years and be functionally usable and still look good (minus windows, roofing, and appliances).

  18. Dickey45-

    First of all, we must value your boyfriend’s time go get an idea if the increase in value was worthwhile. If he put $100,000 worth of labor to only realize $60,000 to $80,000, then you net negative economic value, but a positive accounting profit. My question is simple: Why do you think your boyfriend can do the work better than a true professional?

    Dickey45 said, “My hope is that people look at real estate in an educated fashion.”

    My reply: Your hopes and wishes do not change consumer behavior. My neighbor hopes that a buyer would “appreciate the quality” of his home–guess what, six months later, and a few substantial price reductions, the place still has not had what the seller would consider a “decent” offer.

    Ultimately if buyers don’t appreciate what you do, then you will end up producing negative economic value.

    The basic idea is this: When you put time, effort, and money in, you expect a return. It’s no good to work hundred of hours, wait months to sell, and average $2 per hour–it may be the case that your boyfriend should work at a fast food restaurant for a better return. Not only does the fast food industry pay sooner (think in terms of time value of money–sooner is better), but his labor is being expended where greater value may be realized (greater pay per hour).

    Again, I suggest developing a plan, and putting it in writing.

    Good luck.

  19. Here is but one example of what can happen:

    This is about a real estate appraiser, but I excerpted the important parts for this conversation:

    “Mathis the homeowner, who has borrowed heavily to finance his dream, worries about being overextended on his under-construction home and the one he is living in but trying to sell.

    That home, also in Redlands, has been on the market since December. He’s cut the price twice in hopes of getting an offer. “I’ve already lost $80,000 more than I planned,” he said.”

    http://www.latimes.com/business/la-fi-hjobsmathis11aug11,1,7955319.story?coll=la-headlines-business&ctrack=1&cset=true

    Bottom line: A real estate appraiser claims to have “lost $80,000” on his home. Since he is in the business, one would think he could have avoided the loss, right? Am I missing something here?

  20. Charles-

    You said, “In MY opinion, the back up offer makes the first deal less likely to fail.”

    My question is this: When backup offers exist, could it be that the selling price is sufficiently low, and thus the first deal is less likely to fail? In other words, if the deal were good enough, why wouldn’t I want to be second in line as a buyer?

    Ultimately it seems that when backup offers exist, the first deal isn’t as likely to fail, but I really don’t see how a backup offer CAUSES a deal to have a greater chance of completion. Thus I suggest the following statement is better, “The vary existence of a backup offer IS A HINT THAT the first deal less likely to fail.” In other words, empirically observed covariation is a necessary but not sufficient condition for causality.

    If a backup offer actually caused the first deal to complete, then why not have someone put forward a shill backup offer, with the knowledge that the earnest deposit would be lost. The basic idea is that the chance of losing the earnest deposit is slim, and in the event it does happen, it is worth it for all the others where it did not. I might suggest that a shill backup offer might reduce the likelihood of a deal going through to completion. In fact, if the first deal fails, then they both do, as the shill is just that.

    What do you think?

  21. hey dickey45, specific to your question about “will buyer’s appreciate our work?”.

    my quick answer is “generally not”. as in, the number of buyers who will pay extra for quality work (especially quality bones) is not exactly huge.

    it helps if your house is in a neighborhood where this sort of work is appreciated (older, established hoods for example). is it?

    you can also try to market your home in a way that highlights these features in an attempt to reach a buyer willing to pay a premium for your work.

  22. Funny enough, we just walked away from a deal that had a backup offer. We were the first offer, and the second offer was for the same price but supposedly “as is” (but with an inspection clause). The sellers got greedy and when we asked for a few things to be repaired or a few $k knocked off the price, they rejected our offer. It pissed us off enough to walk away. Turns out the second place offer has also pulled out, so the seller is now going to the third offer (at a much lower price) or will have to go back on the market.

    In this case I think the seller thought he was in a better negotiating position by having a backup offer, but he forgot out our power to call his bluff and walk. We’re glad we did, the market’s not getting any hotter anytime soon.

  23. 1031 Exchange Sacramento

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