How to Handle Back-Up Offers and Earnest Money

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Real Estate

Your client finds a home that they absolutely love, but their offer was refused, and it’s gone under contract with someone else. It’s a heartbreaking situation, and one many went through a few years ago. So, now what can you do?

Submit a Back-up Offer

The good thing is, in the state of Texas, your buyers have the option to go in as a back-up contract. While no one wants to be second in line, offering a back-up contract is a great way to get the home should the first contract be terminated, especially when we’re in a hot market.

After submitting a back-up offer and it is accepted by the seller, if the first contract falls through for any reason, your buyer is first in line for the house. During this period, your client will still need to pay an option fee and submit earnest money.

Understanding the Contract

If your buyer decides to go in as a back-up offer, it’s important they understand this is a legally binding contract, not a ‘handshake’ deal. By giving an option period, however, the buyer can continue to look for other properties and terminate, losing the option money but not the earnest.  Just like with any executed contract, earnest money and the option fees are both paid, and the contract is submitted to the title company.

Earnest Money and Option Fees

It’s not uncommon for a buyer to have questions surrounding the earnest money that was just handed over since it is typically around 1% of the offer price. It is suggested that they give a small amount of earnest and agree to more if put into first place. That way, the buyers' money is not tied up. Make sure your buyer understands that if their contract is terminated, the earnest money will be refunded. However, the option fee will not be refunded. The option fee could be a smaller amount as well, with more delivered than in the first place. It gives the buyer a ‘longer option to terminate’.

Should the original contract terminate, the selling agent must let the buyer agent know immediately about the termination, since it affects when the back-up contract moves into the primary position and becomes the active contract.