Backup Real Estate Contracts

The Colorado real estate market is hot. Prices are soaring, even in areas that were “left for dead.” In such a hot market, it is common to have a contract with a second buyer that is contingent on the deal falling apart with a first buyer called a backup contract. That is to say, a seller will negotiate the sale of his or her home with buyer #1, the primary buyer. In the contract, it will target a closing date with that buyer. At the same time, the seller will negotiate a contract for sale of the same property with buyer #2, the backup buyer. The contract will state that in the event the sale with buyer #1 fails, buyer #2 will then be in contract for the purchase of the property. In “normal” markets, such a circumstance is unlikely to occur; in a hot market where demand far outstrips supply, such a circumstance is more likely.

There are circumstances wherein a seller will negotiate multiple backup contracts with various buyers. Later offers from potential buyers would be in order of when those backup buyers signed backup contracts.

Sandstone Case
In 2001, an issue before Colorado courts was when the seller and buyer #1 extended the closing date. In the meantime, buyer #2, who signed a backup contingent contract, claimed that because the deal was not consummated by the date in the contract, which was the term of the contract between the seller and buyer #1, he is therefore placed into the first position. This is the case of Sandstone Investments v. Edward Williams.

In that case, the Colorado Appeals Court ruled that, based on the language of the contract, the seller agreed to a contract with buyer #2 if the sale was not “consummated” by the closing date. As such, buyer #1 took first position and the seller was now obligated to sell the property to buyer #2.

Issues with Backup Contracts
Buyer #2 may believe that he or she will be next in line in the event that the deal fails, which is a common occurrence. In reality, however, negotiating a backup contract will increase the likelihood that buyer #1 closes the deal with the seller. By negotiating a backup real estate sales contract, buyer #2 is sending the message that there is no comparable property on the market to the property being negotiated. As a result, for reasons that a buyer may pull out of a contract, e.g. price too high, better property elsewhere, better neighborhood elsewhere, buyer #1 is less likely to believe that a better deal exists.

In addition, if the issue is air conditioning problems or similar infrastructure issues, buyer #1 is less likely to pull out if he or she knows that others want it. Without a backup, buyer #1 would not clinch the deal; now, with others wanting the same property, buyer #1 is more likely to forgo these issues.

Colorado real estate is red hot. You need an attorney who knows the law and knows the market. For questions about property rights or other real estate legal needs in Colorado, contact the Law Offices of Eric L. Nesbitt, P.C. at 303-741-2354 or Info@NesbittLawOffices.com.