What is a Bump Clause in Real Estate?
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Bump clauses are one of the many ways people have tried to reduce that stress and facilitate sales.
But what is a real estate bump clause? Read on to find out!
What is a Bump Clause?
A real estate bump clause lets sellers enter into a contract with a potential buyer while reserving the right to continue marketing their property. If the seller gets a better offer, either more money or fewer contingencies, they’re allowed to “bump” the first buyer. They do this by canceling their contract if that first buyer doesn’t match the new offer.
Also known as a “contingency clause,” this provision is most often used when a buyer’s offer is contingent on them selling their current home before closing with the seller.
Bump Clauses Can Benefit Both Parties
Bump clauses in real estate contracts act as a protection for sellers. It helps by allowing them to get the security of entering into a sales contract without losing the opportunity to close faster. It also gives them the chance at a better price should the buyer’s contingencies cause significant delay.
And for buyers, offering a bump clause provides the opportunity to enter into contracts that might otherwise be rejected by sellers due to the offer price or contingencies.
Real Estate agents can and do show bumpable properties, so buyers need to understand how a bump clause works before entering any contract.
At the same time, bump clauses can be an important tool in reducing stress and getting the best deal for sellers – so they should understand the advantages and disadvantages as well!
How Bump Clauses Work in Real Estate Transactions
Unless this is their first home, most buyers will need to sell their current home before purchasing a new one. This leads to most buyers making offers contingent on them selling their home first.
If a seller accepts that bid and enters into a contract without a bump clause in place, they’ll have to take their home off the market during the contingency period (generally 30 to 60 days).
However, with a bumpable contract, the seller can keep their home on the market and accept new offers. If they do receive a second offer, they’ll need to notify the original buyer. The buyer will have only a few days to increase their offer price or waive their contingencies to match the new written offer.
Should the initial buyer fail to match the new offer, the seller then returns the earnest money and proceeds with their other buyers.
Real Estate Bump Clause Advantages & Disadvantages
The primary benefit of bump clauses for buyers is the opportunities they create you might not otherwise have.
Bump clauses help buyers make their offers more competitive; in exchange for the risk that you’ll have your offer bumped, you can include a bump clause in your offer to get acceptance from a seller despite shortcomings like bad credit, a need to sell your current home or other contingencies that put you at a disadvantage in a hot market.
In cooling markets, bump clauses can help you, the buyer, convince sellers who have unrealistically high list prices to accept your more reasonable offer. The longer they have to think about the real deal they have with you vs the one they’re hoping to get but not finding, the more likely they are to close.
The main disadvantage of bump clauses for buyers is the lack of security in your deal.
While a home in contract without a bump clause is likely to close unless the sellers fail to meet your contingencies (which suggests it’s not a good deal for you), a bumpable contract could leave you out a lot of work and dashed hopes should the seller get a more favorable offer that you can’t match from other buyers.
The biggest advantages of real estate bump clauses for sellers are security and leverage.
By accepting a bumpable offer, the seller gets the security of a deal in hand. This comes without the opportunity cost of being unable to market your property for the few months it may take to close and the stigma that can come from re-listing a home if it fails to close.
At the same time, a bumpable contract provides you with leverage for any new buyers that express interest. With an offer already in hand, you’ll be able to ask for higher offers or more favorable contingency terms than you can without an offer.
The primary disadvantage of bump clauses for sellers is the risk of losing deals in one of two ways.
One, by putting off qualified buyers with good offers because they don’t want to take the risk of being bumped.
And two, by bumping an original offer for a second buyer that seems better but ultimately doesn’t close.
Bump Clause Real Estate Tips
In hot housing markets, sellers regularly receive high offers without contingencies. As markets cool, contingencies become more frequent as buyers start to feel more confident they won’t lose a property because of their contingencies.
Bump clauses tend to emerge in this hot to cool transition period as sellers can be slow to lower their expectations to fit the more difficult-to-sell climate.
With this in mind, know that as a buyer you’re less likely to have your bumpable offer accepted in heavily seller-biased markets, though it may still be worth making the offer to give yourself a better chance of getting a “yes” if you feel you need it.
Buyers Have Choices
If you do enter into a bumpable contract with a seller and they get a better offer, don’t be too quick to waive your contingencies despite the pressure you might feel.
You could find yourself in a precarious financial position should you waive your home sake contingency, and if you’re unable to close the deal in time you’ll lose your earnest money and any other payments you’ve made.
And if your offer has a home inspection or other contingency, you could find yourself stuck with massive repair or maintenance costs and headaches that would have been found or addressed had you kept your contingency in place.
While hot markets lead to higher offers with fewer contingencies, as the market cools the prices come down and contingencies re-emerge.
With this in mind, know that if your experienced real estate agent suggests accepting an offer with a bump clause you’re likely in a cooling market and you may want to adjust your expectations downward to avoid the frustrations of a drawn-out sales process.
It’s also important to realize that asking for a bump clause to be included will turn away qualified buyers. You should be cautious about suggesting bumps in buyer-favored markets.
That being said, don’t rush to bump an initial offer just because one comes in closer to your ideal selling price.
There can be less obvious drawbacks like a buyer without mortgage pre-approval or worse credit, so be sure to vet your follow-up offers before bumping your original buyer.