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 COMPANY
“ The Texas real estate market
continues to see demand
increase, creating very
competitive situations... ”
