The Texas real estate market has experienced a robust year thus far.  Home prices are at an all-time high inventory is tight and the market shows no sign of slowing down.  We will see thousands moving into North Texas over the next couple of years to work for major companies like Toyota State Farm and Liberty Mutual Insurance and these families will be looking to purchase homes in the area.  As a result homes can be listed for sale and receive multiple offers all in the same day.  No matter how good the offer is another offer may win the contract.  Understanding how Back-Up Contracts work is critical if you are going to participate in the current North Texas real estate market.

What is a Back-Up Contract?

Back-Up Contracts are enforceable contracts; they are simply subject to one additional contingency i.e. termination of the First Contract. A Back-Up Contract is a binding contract and as such both option and earnest money must be paid (and delivered) per the terms of the contract. It is mistakenly believed that holding the option fee or waiting to deposit earnest money on a back-up until the first offer falls out is proper. Remember the purpose of a Back-Up Contract is to have the right to purchase the property if the First Contract falls through.

How Binding is the Back-Up Contract?

The Seller is bound to the Back-Up Buyer in the event the First Contract terminates. On the other hand if Buyer pays for an option Buyer has the right to walk away from that binding contract. The fact that the Buyer never exercises that right is immaterial; the Buyer is paying for that right from the minute the Back-Up Contract is executed. Without the option Buyer would be bound to the Seller subject to the contingencies under the contract which in the case of a Back-Up Contract includes termination of the First Contract.

When must the Back-Up Buyer perform under the contract?

The Buyer is not required to perform until the First Contract terminates.  The Seller is required to give notice to Buyer that the First Contract is terminated.  The date of Seller’s notice that the First Contract has been terminated becomes the new “amended” effective date of the contract and the date from which the Buyer is required to perform all other obligations.  Many concerns have been expressed about the option fee and that it shouldn’t be called for in the situation where a buyer may not even have an opportunity to buy the property.  The option fee paid in a Back-Up Contract is for the right for Buyer to terminate the Back-Up Contract. Remember the purpose of a Back-Up Contract is to have the right to purchase the property if the First Contract falls through.

What if I find another house I like better but have a Back-Up Contract on another home?

If a termination option applies the Back-up Buyer may terminate at any time before the contract becoming primary.  Only if the Back-Up Contract becomes primary does stated number of days for the option period kick in.

If the Back-Up Contract never moves into primary position is the Back-Up Buyer refunded the earnest money and option fee?

The Seller retains the option fee but Back-Up Buyer is entitled to a return of the earnest money.

If my Back-Up Contract becomes primary what do I do next?

The Buyer is obligated to perform from the amended effective date as if the contract had been signed on the amended effective date. Among other actions that may be called for in the contract Buyer will perform inspections provide lender with any requested documentation review the title commitment and other documents provided by the title company and generally make arrangements for the move to a new home.

What is the title company’s role once my contract becomes primary?

The title company’s main function is to provide title insurance to the Buyer and any lender financing the purchase. Title insurers differ from other kinds of insurers in that their goal is to “eliminate” all risks of title defects rather than “assume” risks. In furtherance thereof title companies In Texas perform three major functions described as follows:

• The search and examination of titles.

• The closing of the transaction or more particularly the handling of all documents and disbursing the funds accordingly as escrow agent.

• The issuance of the title insurance policies.

Once the Back-Up Contract becomes primary the title company begins the examination of the public records related to the home’s title. This provides warnings of title flaws that must be dealt with before the property can change hands. For instance the existing owner may have outstanding mortgages judgments property taxes assessments or homeowners dues. Title professionals work hard to see that such issues are resolved well before closing if possible by ordering payoff statements and coordinating lien releases or other necessary documentation.

Finally the title company will prepare (or provide any information necessary for the lender to prepare) the settlement statement which outlines all of the costs associated with the closing. On closing day the title company will guide you through signing a number of documents and once the signing is done and all the funds have been collected and are ready for disbursement you are a homeowner.

The behind-the-scenes process continues after the closing with the title company making payments to entitled parties recording all necessary documents and issuing the title policies. But your work is done. Your title company takes care of these post-closing details. You’ve made it through the trials of this multiple-offer Seller’s market and you can now enjoy your new Texas home!


Contributed by Allegiance Title