The pros and cons of backup offers and what it all means…

Sometimes, there is a one-of-a-kind home that you just fall in love with.  For some, you may not even realise you’re wanting to buy a new home until you see your dream home!  But what happens if you’re just a tad too late, the property is still being advised for sale but the salesperson tells you its already under contract?  Read on!

If a property for sale is already under contract then a seller may accept a backup offer in the event that the first contract falls over.

A backup offer stops the seller from entertaining offers from other buyers or putting the home back on the market.  If prices have gone up because you’re buying a rising market, you’ve locked in the original price in your backup offer.  It also means that the seller can’t give the first buyer an extension of time to carry out their due diligence.

There are a few different ways that a backup offer can work and it is all dependent on what the terms and conditions in the first contract include.  Here are two common scenarios that include a back-up contract.

Scenario 1: If the property is under contract with an escape clause (an escape clause is often included when the first contract is conditional on the sale of a property), then a backup contract can work towards satisfying their conditions as quickly as possible.

The benefit to the back-up buyer here is, once they are in a position to go unconditional, the seller would serve notice to the first agreement (usually between 3-5 working days, depending what time frame has been mutually agreed to in the first contact).

If the buyer with the first agreement can’t satisfy their conditions in time, then their contract falls over and the property is sold to the buyers with the back-up agreement in place.

Scenario 2:  The property is under contract for 10 working days with no escape clause.  Another buyer can make a backup offer which, if accepted, puts them under contract conditional to the first contract falling over.  The benefit to the buyer here is that if the first agreement falls over, then you have secured the property for a certain time period to carry out your due diligence on terms and conditions mutually agreed to.

There are a few cons to having a backup agreement in place that you need to be aware of. If you have made a conditional offer, such as conditional on a building report for the standard 10 working days, then your time starts from the first working day after acceptance of the agreement.  This means that you would need to arrange to get your building inspection carried out (and arrange for any other conditions) before anyone knows that status of the first agreement.  Worst case scenario would mean that you have paid money for your building inspection, any lawyer fees and any other due diligence costs with no reimbursement to your costs if the first agreement goes unconditional and the property is sold.

There is a way around this, if it is mutually agreed and written into your backup offer, that your due diligence period doesn’t start until the cancellation of the first agreement.  For the buyer, this means that you wouldn’t have to waste any money on reports until you know you’re first in line for the property.  For the seller however, this would mean waiting longer to your prospective unconditional date.  This could be an option for scenario 2, however in scenario 1 it is more like a race between both buyers to see who can go unconditional first, with the first agreement having the first option (see the escape clause).

Backup contracts require attention to detail to make sure that they are written and explained correctly and they also rely on the dates to align with the first contract in place.  You should always seek legal advice prior to making any offer and if you have any doubt, slow down the process and make sure you ask for clarification.

To talk more about this, please feel free to email anita.dobson@harcourts.co.nz or give us a call.

*This article is very general in nature and does not constitute legal advice.