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A backup contract is an agreement between a willing buyer and seller to proceed with a real estate transaction if a prior contract fails to materialize for one reason or another.
As real estate is an item of high value, opportunity costs of each missed sale can mean a huge loss to a seller.
This is why homeowners often agree to backup contracts to protect the value of their assets should an agreement to sell fails to proceed to closing.
For example, if a homeowner agrees to sell his house to a buyer for $200,000 and refuses to entertain other offers at the same asking price because of trust in the transaction going through, then a failure to close on the part of the buyer will mean that the seller had foregone the chance to sell it at that price to other concrete buyers.
The value of the property might even have fallen during this period of uncertainty. And if the seller puts the property back on the market, he might end up with a lesser transaction price.
So in order to protect his interest, he might agree a backup contract with another buyer just in case of unforeseen circumstances that prevent the sale from going through.
This could be due to the buyer failing to obtain sufficient financing to fund the transaction. Or even a drastic turn of events that made the buyer change his mind about buying the property.
However, when a seller employs such strategies, it is important to inform the original buyer of it so as to prevent disputes from taking place.
For example, a buyer might inform the seller that he is unable to obtain approval for a mortgage. In turn, the seller quickly proceeds with closing with the other buyer. And a week later, the original buyer comes back and informs the seller that he has obtained a loan fro another lender insisting that he had never abandoned the transaction in the first place.
This can be a messy affair.