Backup offers' value debated

Realty agents, homebuyers are divided on standby bids if a primary deal falls through

December 18, 2005|By DANNY MILLER | DANNY MILLER,LOS ANGELES TIMES

No one likes to play second fiddle. But in the current housing market, there is increasing pressure on buyers to make backup offers - securing themselves the No. 2 position in case the original deal falls apart.

For their part, sellers like the bargaining leverage of having other buyers waiting in the wings and the safety net they provide should the house fall out of escrow. Because escrows are confidential and not recorded until a sale closes, there are no numbers on how many deals fall through. Anecdotally, however, Los Angeles-area real estate agents report that fallouts are on the rise - all the more reason to have someone else ready to step in.

"I've seen more and more deals falling apart these days because of buyers promising the moon and making crazy offers," said Natalie Neith, an agent for the John Aaroe Division of Prudential California Realty.

Eager to make the sweetest offer they can in this competitive market, buyers sometimes promise more than they can deliver. The result: The bank says no, and the buyers cannot qualify for the financing they need.

Are backup offers something all buyers should consider? Some real estate agents urge buyers to make them. Others advise against doing so, recommending that buyers rely on agents with strong contacts and an ear to the ground to find a house.

Michael Edlen, a real estate agent with Coldwell Banker in Pacific Palisades, sees no reason a buyer shouldn't toss his hat into the ring even if a property is in escrow. Most backups come from people who have submitted an offer but didn't get the house.

Getting in line as the official backup isn't time-consuming - it takes only a few minutes to fill out the two-page addendum - and the risks to the buyer are nearly nonexistent.

"I can't think of a single buyer I represented who ever regretted being in the backup position," Edlen said.

He recently worked with a young couple who had their hearts set on a house in the Palisades that had just gone into escrow. The sellers accepted their written backup offer, but when the couple found out they were fourth in the backup line, they were crushed. Edlen advised them to hold tight.

Sure enough, the primary buyer backed out because of a problem that came up during inspection. A day later, the first backup position withdrew their offer as well. The next couple had found another home, and the person who had made the third backup offer was no longer interested.

With their financing approved and their paperwork in place, Edlen's clients were able to quickly close the deal.

Gary Edelstone, an attorney with Surpin, Mayersohn & Edelstone, Century City, advises clients selling their homes to accept backup offers, but he sounds a cautionary note.

"Sellers need to make sure they give all backup offers the same level of scrutiny as the original offer, since they will be obligated to honor the terms of the contract if the first deal falls through," he said.

So who does a backup offer benefit more: the buyer or the seller? Edelstone points out that sellers can use backup offers as a strategy to prevent potential buyers from making too many demands.

"When buyers know that there are people waiting in the wings to purchase a house," he said, "they may feel pressure not to request extensions or contingencies."

That happened to Tracy Moore and her partner, Lisa Edwards. After the couple made a successful offer on a 1920s duplex, they learned that the seller had accepted a strong backup offer. There were some issues with the roof and the plumbing, but with the backup offer on the table, Moore said she felt as if they didn't have a lot of flexibility in their negotiations.

"We really wanted the property," she said, "so we felt we had to take it as it was."

Steve Wallis and his wife, Eileen Ehmann, renovate and restore homes in Los Angeles. After completing an extensive restoration of Dean Martin's former residence in the Hollywood Hills, they were thrilled to get a full-price offer before the house went on the market.

The offer seemed so strong that they decided not to show the house. But during escrow, the buyer got cold feet. He bailed at a terrible time - Labor Day weekend. With no other offers in place, Wallis and Ehmann had to start from scratch, and by then, they had missed the busy summer market.

"We learned our lesson on that house," Wallis said.

The couple recently sold a house in the Hancock Park section of Los Angeles on the first day it was listed but waited until they had someone lined up in the backup position before they accepted the offer.

Not all real estate agents advocate submitting written backup offers. David Raposa, owner of City Living Realty, recently represented a couple eager to find a house in a specific neighborhood.

When a fixer-upper became available, Raposa's clients cut short a trip to Hawaii and flew back on the red-eye so they could attend the open house. They loved the house and made an offer that day, but after some counteroffers it went to someone else.

Raposa knew the listing agent, and when the first deal collapsed, he made an appeal on behalf of his clients. Getting involved on a personal level can be more effective in certain situations than having a signed document.

"It's all about relationships," said Drew Mandile, an agent with Sotheby's International Realty, Beverly Hills. Mandile and partner Brooke Knapp sell luxury properties in Beverly Hills and Bel-Air.

"We prefer to keep things verbal. From my perspective, I can't think of a single advantage that having a written backup offer provides."

Danny Miller writes for the Los Angeles Times.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.