Back-up Contingency Agreements Revisited

​Low inventory has been driving multiple-offer situations and bidding wars.
If the perfect house is already under agreement, your Buyer may want to secure a position by using a back-up offer.
 
GAR Forms has the situation covered by submitting the basic Purchase and Sale Agreement and including a Back-Up Agreement Contingency (F604) as an Exhibit. If the agreement is accepted by the Seller with the Back-Up Agreement Contingency Exhibit included, it becomes a Binding Agreement – in second position.
 
From the Seller’s standpoint, there are good reasons to accept a back-up, especially if the price and terms are better than the first agreement. From the Buyer’s standpoint, there are considerations.  The back-up Buyer may need to increase the price or be flexible on terms to be accepted as a back-up.  Further, a back-up can work against the second Buyer by elevating the primary’s motivation to make the deal work, so the Primary buyer may be more likely to forgive inspection issues and be more cooperative in Seller negotiations. 
 
Buyer Protections
All things considered, the Buyer’s risk is moderated by protections built into the GAR back-up contingency exhibit.
 
The back-up Buyer is not locked in until they become Primary.. 

• The Buyer can terminate the back-up agreement at any time prior to it becoming the primary.  So, if the Buyer finds another house, they can terminate the back-up and go for the other house. The formal process is a Notice of Termination from Buyer to Seller and payment of $10 to the Seller (F604#6).  
• Second, the back-up Buyer can place a time limit on Seller’s ability to make the secondary into the primary.  That is, if the back-up does not become the primary by a certain date, the back-up agreement automatically terminates.  (F604#6)
• Third, there is a formal process by which the back-up becomes the primary.  The Seller has to terminate the original agreement and then has to send a formal notice to the back-up that it has become the primary.  (F604#5) Until the Seller completes the formal process, the Buyer can back out.

 
Multiple Back-up Agreements
If there are multiple back-up agreements, the order that the Seller signed the agreements would be the order in which they are entitled to become primary.  Later offers would, of course, most often be at higher prices.  This would to entice the Seller to sign a backup offer instead of putting the home back on the market if the first sale failed.
 
Earnest Money Deposits
The timing of the earnest money deposit is a negotiable term.  If your Buyer does not want to deposit earnest money until the agreement becomes primary, write it that way.  But if the Agreement is written that the earnest money is due upon binding (or days after binding) agreement, then it must be paid that way.  An accepted agreement, even one with a back-up contingency, is a binding agreement.
Note: Delaying payment of earnest money could be interpreted by the Seller as a negative strike against a Buyer.  Something to consider.
 
The Binding Date Changes Upon Delivery of Notice of Primary Agreement Termination
Time limits for a secondary agreement that has become the primary agreement start on the date that the Seller sends Notice of the Termination of the Primary Agreement.
The new Primary Buyer still has the right to conduct its due diligence or fulfill other contingencies.  If the changes to the contingency periods or the Due Diligence period overlap the closing date, then the new closing date is extended to seven (7) days from the last date Buyer has to fulfill Buyer’s contingencies or the end of any Due Diligence Period, whichever is later. (F604#5) 
Hope this helps!