YOU ARE HERE: LAT HomeCollections

Second-place winners

In this tight market, buyers may overextend a bid, only to have the deal crumble. That's when the runner-up can swoop in. But the uncertainty can be crazy-making.

October 30, 2005|Danny Miller | Special to The 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.

Since escrows are confidential and not recorded until a sale closes, there are no numbers on how many fall through. Anecdotally, however, 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 in Larchmont Village.

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 find they cannot qualify for the financing they need.

Are backup offers something all buyers should consider?

The jury is out. 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 why a buyer shouldn't toss his hat into the ring even if a property is in escrow. Most backups come from people who have already submitted an offer but didn't get the house. Getting in line as the official backup isn't time-consuming -- it only takes 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 people in the first backup position withdrew their offer as well. The next couple had already 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 finalize the deal.

Gary Edelstone, an attorney with Surpin, Mayersohn & Edelstone, Century City, represents high-net-worth clients on tax and real estate transactions. He 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."

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 pair made a successful offer on a 1920s duplex in the mid-Wilshire area, they learned that the seller had also 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 like 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 even 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 eventually 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 Hancock Park 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, a company that specializes in homes in the historic West Adams district, recently represented a couple who were eager to find a house in Wellington Square.

Los Angeles Times Articles