A backup contract in a real estate transaction is a secondary contract on the purchase of a property that cannot become a primary contract unless the primary contract becomes null and void, either because of the buyer's inability to execute the deal (because of finance issues, problems arising from a property inspection or personal contingencies) or by choice.
One Contract at a Time
A backup contract is an unaccepted offer. Because the seller has accepted the primary contract, he cannot accept a backup contract unless the primary contract is dead. At that point, he would be free to accept the best backup offer.
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A backup contract is beneficial to a seller because it increases the chances that the sale of her property will be completed and closed. Backup contracts are common in areas of high desirability, such as in-town locations, country clubs or areas where there are more buyers than sellers.
There's no risk to the buyer in the primary contract if he executes his obligations properly. The closing will be completed regardless of the existence of a backup offer.
A backup contract can be valuable to the seller if the primary contract was taken on a "contingency," which is when a contract is contingent on the sale of the buyer's current home. The seller might agree to accept the offer with a "kickout clause," which would require the buyer to remove the contingency in a specified amount of time should an acceptable backup contract be offered.
If a property inspection turns up problems that were unknown to the seller and there is a backup contract, the seller might use the backup contract to present a "take it as is or the secondary offer wins" argument to induce the buyer in the primary contract to go ahead with the transaction.
Joey Campbell spent eight years in real estates sales and property management. She has been active in residential and commercial mortgage for the past 23 years in the Southeastern U.S. Campbell has attended hundreds of seminars, and has written and conducted workshops on subjects such as credit, debt excelleration and prequalifying for residential mortgages.