Real estate markets are cyclic, and in competitive times, savvy strategies matter. One underutilized approach is the back-up offer, presented after an initial offer is accepted, ready to step in if the first deal fails. Such primary deals can falter due to financing challenges, unexpected property issues, or even buyer remorse. While it doesn’t guarantee success, a back-up offer enhances an investor’s chances in a hot market.
If you’ve been investing in real estate for a while, you know that real estate goes through boom and bust periods. The period between 2007 and 2011 was a bust, while 2011 to 2021 was a boom period. In a market characterized by high competition, acquiring rental properties for investment often requires out-of-the-box thinking and strategic persistence. One such underutilized strategy is the back-up offer, a powerful tool often overlooked by many investors.
The back-up offer is a contract submitted by a potential buyer after the seller has already accepted an initial offer. In essence, it’s a standby agreement, waiting in the wings should the primary deal fall through. It’s like having a plan B ready to jump into action if plan A fails. Given the dynamism of real estate markets, plan A doesn’t always proceed smoothly and the back-up offer becomes a game-changer.
What’s surprising is that despite its potential benefits, the back-up offer is frequently underutilized. Often, investors don’t consider it an option or get easily disheartened when they don’t win the initial offer.
So, why does the primary offer fall through so often? There are several common reasons.
- Financing Problems: Sometimes, a buyer’s loan doesn’t get approved, or they don’t qualify for the amount of financing they initially thought. Lenders often have stringent criteria, and even a minor discrepancy in the buyer’s financial portfolio can lead to a loan denial.
- Inspection Issues: A comprehensive property inspection can sometimes reveal problems that the buyer isn’t willing or prepared to deal with. This could range from structural issues to hidden costs related to repairs or maintenance.
- Appraisal Shortfalls: An appraisal that comes in lower than the purchase price can cause a buyer to back out if they’re unable to make up the difference, or if a lender isn’t willing to cover a higher loan value.
- Buyer’s Remorse or Changed Circumstances: It’s not uncommon for a buyer to get cold feet or for life circumstances to change after the offer has been accepted, leading to the deal’s termination.
- Buyer using a bait and switch: Occasionally, there are unsavory buyers who put in an offer with no intention of paying cash. Their goal from the beginning is to get the property under contract, then convince the seller to accept a financing arrangement.
Given these factors, the initial offer doesn’t always result in a successful sale, presenting a great opportunity for back-up offers. By stepping in swiftly when the initial deal collapses, the back-up offer often secures acceptance by sellers eager to close the sale.
We have used the back-up offer strategy numerous times. Many in our community have also used the back-up offer strategy. In our experience, the most important thing is to be consistent. Never forget to put in a back-up offer because you can’t predict when a back-up offer will turn into the winning offer.
Using the back-up offer strategy effectively requires a certain level of finesse and patience.
Here are a few tips for prospective investors:
- Make your offer competitive: A back-up offer isn’t just about waiting for the first deal to collapse. Make sure your offer is competitive, appealing, and stands a good chance of acceptance if the initial deal fails.
- Stay updated: Have your agent keep in regular contact with the listing agent. Express your continued interest in the property and request to be informed immediately if the initial offer falls through.
- Remain flexible: Be ready to adjust your terms quickly if the initial deal fails. This could mean being prepared to escalate your offer, waive contingencies, or expedite the closing process.
- Don’t put all your eggs in one basket: While waiting to see if your back-up offer is accepted, continue your property search. You wouldn’t want to miss out on other opportunities.
In a hot real estate market, using a back-up offer strategy can be a valuable tool for securing investment properties. It might not always result in success, but it increases your chances significantly. The key is to remain patient, persistent, and open to opportunities, because in real estate, it’s not always the fastest offer that wins, but the one that’s ready when the moment is ripe.
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