How Does a Backup Offer Work on a Short Sale?

A short sale can save a borrower from foreclosure. In a short sale, the borrower sells his property at price that won't cover the money left on his mortgage. Although the seller won't make money off the sale, he's still responsible for getting a real estate agent, showing the home and finding a buyer. The first offer he accepts becomes the primary offer. If he accepts other offers while waiting for the first deal to close, those offers can become a contract backup.

Short sales involve two contracts and at least one contingency, an event that can make or break the deal. One contract is the sale agreement between the seller and buyer, and the other is the seller and lender's loan satisfaction agreement. The seller getting the lender to agree to lower the loan balance so the short sale can go through makes every short sale a contingent short sale. While the lender has to agree to reduce the balance, the lender doesn't approve the buyer and is not a part of that contact.

In a traditional sale with multiple offers, the offer in the first position is the one the seller accepted and signed a sales agreement for. Any offer the seller accepts after that becomes a backup offer and becomes an active contract only if the first deal falls through. Since an offer in a short sale is contingent on the seller getting consent from the lender, the seller might accept a backup offer from one or more other interested buyers to cover himself in case the first deal falls through. A contingent short sale can take months, as the lender must agree to the loan balance reduction, and the first buyer might not want to wait.

In a normal sale, the seller will weigh all offers himself and accept the best one. But with short sales, the seller has to deal with the lender and won't make any money. A seller should consider multiple offers to minimize damage to his credit rating and avoid other potential short sale consequences, such as taxes on forgiven debt. However, a seller is not obligated to accept a contract backup or any other offers in a short sale. She does not have to continue to show or market the property once she's received an offer that will satisfy the lender.

There are a variety of reasons a contract on a property could fall through, whether it's a short sale or not. The original buyer could have trouble lining up financing, or suffer a sudden financial loss if he intended to pay cash. Something could come up during the home inspection that causes the first buyer to back out. In some cases, the first buyer finds a property he likes better before the contract is finalized. In those cases, a backup contract can come in handy.

The real estate agent and seller must decide whether to accept backup offers and how to handle the marketing for offers. They can, for example, market the property and accept offers only during a set period of time, such as 30 days, and then forward the best offer to the lender. Or they might choose to take the first offer only and stop showing the property. Each offer represents a new set of short sale paperwork for the real estate agent and seller in most cases. Some lenders have streamlined short-sale procedures for a backup offer. Having at least one contract backup on a property can give sellers the comfort of knowing they have something in place in case the first buyer backs out of the deal. For buyers, putting a backup offer on a short sale can be a gamble, but they can always withdraw the offer if they find another property, but if they put a contract in, that contract is immediately effective if the first buyer falls through.