Most contracts of sale contain suspensive conditions of some kind, so you might need to get a back-up offer or two in case your sale "falls through". Back-up offers can protect you and save a lot of time if your buyer cannot fulfil the suspensive conditions of your sales agreement.
What is a back-up offer?
A back-up offer is an offer to purchase your property that waits in line behind a previous offer to purchase the same property. If the first agreement of sale cancels, the back-up offer comes into effect.
Here's how it works:
You get an offer to purchase your property, but it contains a suspensive condition that makes the sale subject to the sale of the buyer's property. This is not the ideal offer for you, but you cannot reject it and then end up getting no more offers, so you accept.
But lucky for you (or unlucky, if you want to be pessimistic) another buyer pitches up, who also makes an offer to buy your property. This buyer might need to include suspensive conditions in his/her offer or not. It doesn't really matter to you. The important bit of information you need to focus on is that you can accept the second offer as a back up offer, if you include a suspensive condition of your own stating that the contract will come into effect if the first contract cancels.
You can, in fact, accept a whole string of offers, as long as you make every back-up offer subject to the cancellation of the offers that precede it. I said you "can" accept a string of back-up offers, but you most probably won't find many buyers who are willing to wait in line for more than one offer to lapse.
Where do back-up offers come into play?
Any situation where a buyer needs to include one or more suspensive conditions in the contract of sale lends itself to protecting your interests with back-up offers.
An offer that contains a "subject to sale of buyer's property" suspensive condition screams for a back-up offer. The sale of the buyer's property is far from a sure thing. And when the deadline for the suspensive condition comes up, you don't want to be caught in a situation where you put all your eggs in one doomed basket.
If the offer contains a suspensive condition that makes the sale subject to mortgage approval and you suspect that your buyer may have any problems in qualifying, you should strongly consider finding back-up offers. Your chances of successfully selling your property improve when you have two buyers who might be able to obtain the required financing.
Sometimes you unknowingly enter into an agreement of sale with a difficult buyer - The "slow negotiator" type described in Tom_Thumb's article about the people you may meet when selling. Now, if you and the buyer hit the proverbial brick wall on some provision of the contract, you or the buyer might end up cancelling the contract of sale. And having a back-up offer waiting in the wings can make that blow a whole lot softer, don't you think?
Wording a back-up offer
A good back-up offer clearly states that you have already received and accepted another offer to purchase your property. Your back up offer should also include a suspensive condition that stipulates that the back-up offer will not come into effect until you give the prior contract is cancelled.
It might be a good idea to also specify that the offer will only come into effect after you give the back-up buyers formal written notice about the cancellation of the first contract.
However you word the contract clause, it must be clear that the back-up offer is contingent on the agreement in the prior position falling through.
Here is how I would prefer my "subject to cancellation of prior offer(s)" contract clause to read:
Annexure ___
Subject to cancellation of prior offer(s)
The buyer(s) make this offer to purchase the property having full knowledge that the seller(s) accepted prior offer(s) to purchase the property.
This agreement of sale is subject to the suspensive condition that the prior agreement(s) of sale cancel(s). This suspensive condition shall be fulfilled only upon written notification from the sellers to the effect that the prior agreement(s) cancelled and that this suspensive condition has been fulfilled.
This offer to purchase is subject to the agreement(s) dated _____________________________.
The problem with back-up offers
Sellers might have some difficulty to get buyers to commit to back-up offers to purchase their property. That is because a back-up offer is just as binding as an offer to purchase in first position. This means that the buyers are stuck in the queue for the seller's property, even if they find another home they want to buy where there are no prior offers to purchase.
Motivated buyers generally don't take kindly to being stuck in a back-up position very long. They are looking for a home. They are not in the market just to be some seller's insurance policy.
Motivated buyers might keep looking at other properties, even after signing your back-up offer. And if something similar or better comes along while you have them on hold, they will want to be released from the back-up offer agreement.
Sellers cannot really blame a back-up buyer for wanting to bail out of the back-up offer, now can they? But it is best to handle the back-up buyer's concerns about cancelling the back-up offer when negotiating the agreement.
If needed, you can give your back-up buyers a way out of the back-up offer by adding one sentence to the wording of the "subject to cancellation of prior offer(s)" contract clause. Here is that sentence:
The buyer(s) shall have the right to cancel this agreement at any time prior to being notified by the seller(s) about the fulfilment of this suspensive condition.
But sellers might be able to satisfy the buyer's needs by simply putting an expiry date on the back-up offer. This would give the seller certainty about how long the back-up offer will be good for, while the buyer will be certain that they will not be locked into this back-up agreement indefinitely. Here is the wording that will achieve the back-up offer expiry date:
This agreement will be binding on both the buyer(s) and seller(s), but if this suspensive condition has not been fulfilled on or before ____/_____/______, the buyer(s) will have the right to cancel this agreement at their sole discretion.
72-hour back-up offers
When you have an agreement of sale which includes a 72-hour release clause, prospective buyers will be far more willing to commit to back-up offers than without one.
The 72-hour clause gives a back-p buyer a fighting chance to actually becoming the first position buyers. The buyers will be able to know if they've "got" the property in a relatively short time. And this is a good thing if time is important to them, as is usually the case.
Just don't forget to include your "subject to cancellation of prior offer(s)" contract clause before accepting their offer to purchase.
Getting back-up offers
To get prospective buyers to commit to back-up offers, the sellers will have to convince them that the first offer is far from being a sure thing.
Look, if the sale was a sure thing, a seller would not waste his time looking for back-up buyers, now would he?
The suspensive conditions in the first offer put the sale squarely in the realm of the unsure. So, sellers would not be exaggerating if they paint a pessimistic picture to prospective back-up buyers.
Sellers should never be dishonest with prospective purchasers, though. So, don't be deceptive with your prospective back-up buyers.
Decide if you need the security of back-up offers or not. You don't want to waste your own or anyone else's time, do you?
If the buyer's are truly interested in your property, they will insist on making a back-up offer, just in case they get lucky. And this is the kind of motivated back-up buyer you want.
