In real estate markets that have recently begun cooling down, bump clauses have become a common feature of purchase agreements. Here, we’ll explain what bump clauses are and how they affect buyers and sellers.
A bump clause is a section of a purchase agreement that allows a seller to continue marketing their property even after signing a contract with a buyer.
Bump clauses have seen an uptick in popularity recently, especially in markets that are experiencing a recent cooldown.
Sellers in these transitional markets are often hesitant to acknowledge that prices aren’t as high as they used to be, and bump clauses can help them agree to accept an offer that’s below their expectations by providing hope that a better one can still come through.
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Let’s take a deeper look at bump clauses: what they are, who benefits from them, and how to use them to your advantage.
What is a bump clause?
Usually, when a buyer and seller sign a purchase agreement, the seller needs to stop accepting offers. When a bump clause is included, a seller is allowed to continue marketing their property and receive offers until all contingencies are met, even after signing a contract. If a better offer comes along, they can “bump” the original buyer.
If a seller wants to accept another offer, they have to inform the original buyer. The buyer can either let the seller know their contingencies have been met or waive them altogether. If neither of these occur, the purchase agreement will be nullified and the seller can move forward with the new offer.
When should you use a bump clause?
Bump clauses are best used in cooling markets where sellers haven’t yet readjusted their expectations (i.e. list prices) to fit the current climate. They can also provide protection to sellers accepting offers with a lot of contingencies.
In a hot market, high offers regularly come in without any contingencies (except maybe a home inspection). As the market cools, bids become lower and contingencies crop up more frequently.
For buyers, bump clauses can help coax sellers into accepting an offer that’s below their expectations by giving them a way out in case a better deal comes along.
For sellers, a bump clause affords them the ability to continue marketing their home and looking for better offers until the contingencies of the purchase agreement are met.
Bump Clause Advantages for Sellers
Bump clauses provide a few advantages to sellers:
Sellers can lock in an offer even if they want to continue marketing their home. This provides them with a solid baseline and prevents their listing from becoming stale. In other words, bump clauses leave the door open for better offers, but sellers don’t have to turn away a perfectly good one for another that may never materialize.
Sellers can use the fact that they’ve already secured a buyer as leverage to negotiate a better offer with other potential purchasers. This forces any future buyers to directly compete with and attempt to one-up the original buyer.
Bump Clause Advantages for Buyers
Buyers can make their offers more competitive by including a bump clause in the purchase contract. While this does pose some risk, it can also help less competitive buyers — ones with bad credit, contingencies, etc. — stand a fighting chance.
Bump clauses can also make it easier for buyers to purchase a house while still trying to sell their current one, as it minimizes the inherent risk of contingencies for sellers.
In cooling markets, a bump clause can help convince sellers with unrealistically high list prices to accept a more reasonable offer.
Bump Clause Tips for Sellers
Sellers should keep in mind the following points when using a bump clause:
- Don’t rush to bump: Even if a better offer comes along, be careful when considering accepting. While there may be improvements, there can also be some less obvious drawbacks like a buyer with lower credit or no mortgage pre-approval. Thoroughly vet any offers before bumping the original buyer, lest you end up with no offers and a listing that’s rapidly becoming stale.
- Realize you may turn away qualified buyers: Although it offers protection to sellers, not all buyers are willing to accept a bump clause as it poses a risk to them. While you’ll leave the door open for a better offer, you may end up turning away one that’s great to begin with. Talk with your real estate agent to evaluate your local market and weigh the upside potential with the opportunity cost.
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Bump Clause Tips for Buyers
Here are some tips for buyers entering contracts with bump clauses:
- Don’t be too quick to waive contingencies: If the seller receives another offer and the contingencies haven’t been met, you will only have a few days to decide whether you want to waive them or not. While throwing caution to the wind and pushing forward to secure your dream home may seem appealing, it’s rarely a good idea. If you waive a contingency that your home needs to sell and you end up not being able to get it off your hands, you’ll lose your earnest money and any other payments you’ve already made.
- Work with an experienced real estate agent: You shouldn’t try to navigate purchase agreements on your own— especially those with bump clauses. Real estate agents negotiate contracts day-in and day-out. A good agent will help you negotiate the contract and ensure you’re getting a fair deal.
Whether you’re buying or selling, if you’re considering signing a purchase agreement with a bump clause, you need to work with an experienced real estate agent.
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Top FAQs About Bump Clauses
1. What are good contingencies when putting an offer on a home?
The most common contingencies are for inspections, appraisals, financing, and insurance. For buyers, basic contingencies include an acceptable inspection, acquisition of a mortgage, and an appraisal that fits within their mortgage allowance. Buyers that are also homeowners should add a contingency that states they must sell their home in order for the purchase to go through.
2. What happens if a buyer backs out of a real estate contract?
If a buyer backs out of a real estate contract for any reason other than the ones specified as contingencies, they will lose their good faith deposit and any other money they put down with the contract. They may be sued for breach of contract, and sellers can also pursue a specific performance lawsuit, which can force a buyer to go through with the purchase.
3. Can you make an offer on a house that has a contingent offer?
You can make an offer on a house that already has a contingent offer as long as you specify that you are making a backup offer. This means that if one of the current buyer’s contingencies doesn’t come through, you will be next in line to purchase the home. If the seller signed a contract with a bump clause, you can make an offer like you would on any other house.
4. Can a house seller back out of a contract?
Sellers that back out of a contract are subject to legal ramifications. If a buyer pursues legal action, a court can order the seller to complete the sale against their will. Additionally, their real estate agent can sue for lost commission fees and marketing costs.
5. What is the difference between pending and contingent?
Contingent listings are still active, but the seller has already accepted an offer and is waiting on the fulfillment of the specified contingencies. When a listing is pending, it means the listing is no longer active and all contingencies have already been fulfilled or waived. The buyer and seller involved in a pending listing are awaiting final processing before closing on the home.