Broker Risk Management LLP Logo

Back-Up Buyers Who Want to Buy a Different Property

by | Apr 16, 2021 | Broker Practice, Contracts and Forms

Q:  My Buyer is in back-up position to buy a home and it is unclear whether the primary buyer will be able

to close.  In the meantime, my client has been looking at other properties and now wants to write an offer on another house.  I am concerned that if we do not handle this situation carefully that my Buyer could be in a position of being obligated to buy two homes and/or possibly trying to cancel one deal without good faith.  What is the best way to handle my client’s request? 

A:   There is a potential risk of purchasing two properties when a Back-Up Buyer wants to acquire another property while still in back-up position.  The key to understanding the Back-Up Buyer’s rights to terminate the Back-Up Contract starts with the contents of whatever Back-Up agreement the Parties have signed.

I.   BACK-UP AGREEMENTS 

A.  Agent-Drafted Back-Up Agreements

Some Seller’s Agents create a counter that states, “Buyer is in back-up position.”  The problem with that approach is that it does not specify the Seller’s rights or obligations as to either the original Buyer or the Back Up Buyer.  Worse, for the Back-Up Buyer, it does not specify the Back-Up Buyer’s right to cancel or whether the Back-Up Buyer is still obligated to comply with the time frames in the Back-Up Buyer’s offer, such as when the initial deposit is to be put into escrow.  Since these issues are not properly dealt with if the Seller’s Agent has used this method, the best practice is for the Buyer’s Agent to counter with a standard, real estate industry Back-Up Addendum.

B.  Back-Up Addenda. The best practice when creating a Back-Up Contract is to use a standard Back-Up Addendum;  

The CAR Back-Up Offer Addendum (“BUO 12/17”) includes the right of the Back-Up Buyer to cancel in paragraph 1:

“Buyer may cancel this Agreement in writing at any time before Seller provides Buyer Copies of written cancellation of Prior Contracts Signed by all parties to those contracts.”

The PRDS Back-Up Contract Addendum (“BUCA 8/18”) contains comparable language in Section 2:

“Until such time as Back-Up Buyer received from Seller written notification that the Primary Contract has been terminated and the Back-Up Contract brought into primary position, Back-Up Buyer shall have the unilateral right to terminate the Back-Up Contract.”

The SFAR Back-Up Offer Addendum (Rev. 12/15) contains comparable language in paragraph 1C:

“Buyer may withdraw this Back-Up Offer, and have all deposits returned, by delivering to Seller a written, signed withdrawal of this Back-Up Offer at any time prior to the Date of Elevation.”

The bottom-line with all three of the above forms is that the Back-Up Buyer may safely buy another property as long as the Buyer abides by the timing requirements of the cancellation provisions of the Back-Up Agreement. 

II.   MAKING AN OFFER ON A DIFFERENT PROPERTY  

Buyers in a Back-Up position may consider making an offer on another Property, however, to avoid creating the disastrous problem that the Buyer is forced to buy two properties at the same time (which is resolved by the Buyer paying damages and legal fees to at least one of the Sellers) and to make sure that the Buyer is acting in good faith as to both Sellers, both of the following must be true:

    1. The Back-Up Buyer MUST Deliver written cancellation to the first Seller PRIOR to the date of Acceptance of the new Purchase Agreement.  To be absolutely certain that this occurs (since the date of Acceptance is not known in advance of making the offer), the Back-Up Buyer should be advised to seriously consider cancelling the Back-Up transaction before Delivering the offer on another property; AND
    2. The Seller has not Delivered a copy of the written cancellation of the Seller’s primary buyer and/or the notice that the Back-up Buyer has been elevated to primary position.  Again, to be absolutely certain that this has not occurred while the Buyer is negotiating on a new property, the Agent should recommend that the Back-Up Buyer cancel the Back-Up transaction before Delivering the offer on another property.

While Agents are negotiating a contract, they do not always check their email regarding other matters; unfortunately, that is often when a notification of the cancellation of the primary buyer’s deal gets delivered. The fact that the Agent did not open the email or did not know it was in his/her inbox is not a defense because “Delivery” occurs when the document is sent by the other Agent.

Although some clients are willing to take risks, others are not.  What is critical for the protection of Agents and their clients in these situations is making sure that the Agent has properly documented in an email to the Back-Up Buyer the risks that the Back-Up Buyer may have in buying two properties at the same time.  That email needs to be sent to the Back-Up Buyer before preparing another offer for that Buyer; that same email should recommend that the Buyer cancel the Back-Up deal first before their offer on a new property is Delivered.

Documenting that Agents have advised clients of the risks that they may face, documenting the choices that the clients make along with why the client is not following the Agent’s advice is the best risk management approach.

See also Weekly Practice Tip:   How to Handle Clients Who Will Not Follow Advice (11-16-18)

 PRACTICE TIPS:  

  1. If a Back-Up Buyer wants to write an offer on another property, the first thing the Agent should do is review the Back-Up Agreement to confirm the Buyer’s ability to cancel and the timing of the Buyer’s cancellation rights.
  1. The Back-Up Buyer’s Agent should send the client an email that warns about the risk of being in a position of buying two properties at the same time and explaining the need to meet the timing requirement in the Back-Up Agreement.
  1. If the Back-Up Buyer does not want to cancel the Back-Up transaction first, document that the client is proceeding against the Agent’s advice and recommendation. 

WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS.  This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents.  It may not be reproduced or distributed without the express written consent of Broker Risk Management.  The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.

© Copyright Broker Risk Management 2021                  04/16/21