When you are selling real estate, you want to get the best possible price.
In a red-hot seller’s market, that’s usually not a problem. But what about when the market starts to cool down?
A bump clause is a way a seller can continue to market a property until the buyer satisfies a specific contingency, such as selling their current house first. With this type of transaction, a seller can “bump” the original buyer if a better offer comes in.
In this article, we’ll examine how a bump clause works and its advantages for both buyers and sellers.
Unless it is their first home, most buyers need to sell their current home before purchasing a new one. In these cases, the buyer makes an offer with a contingency that they sell the other home first.
If the seller accepts the bid and enters into a contract without a bump clause, the seller has to take the home off the market. No other bids will be accepted during the contingency period. A typical contingency period typically lasts between 30 and 60 days.
With a bump clause, however, the home remains on the market. If another buyer makes a better offer, the seller must notify the original buyer. Then that buyer has only a few days to waive their contingency or increase their offer.
Otherwise, the original contract becomes void. The seller returns the earnest money to the original buyer and proceeds with the new offer.
In a hot real estate market, homes often sell without contingencies. For example, in the pandemic-fueled housing market of 2020 and 2021, many homes across the country sold above their asking prices with no contingencies other than the home inspection.
However, hot markets eventually start to cool down. Bump clauses allow sellers to accept an offer that may be below their expectations along with a way out if a better deal comes along.
On the other hand, a buyer can present an offer with bump clauses as a way to encourage a seller to accept a bid with a contingency.
Typically there are two different time frames for real estate bump clauses: the 72-hour bump clause and the 48-hour bump clause. Sellers and their agents use the set time periods as a negotiating tool to encourage buyers to act quickly.
The 72-hour bump clause. With this clause, the seller will keep the property on the market, providing the original buyer with a 72-hour first-right-of-refusal notice if a better offer comes in.
The 48-hour bump clause. This clause allows the original buyer a period of 48 hours to waive the contingency or increase their bid on the property.
If the buyer does not meet the time frame stated on the contract, the seller is free to move on to a second offer.
Interested in learning more? Check out our article Real Estate Contingency Clause Examples: How Buyers Avoid Getting Burned.
Here are some other terms you need to know when dealing with bump clauses in real estate transactions.
The no-bump bump offer -- A no-bump contract is just like it sounds. If the seller accepts an agreement with this wording, they cannot back out if a better offer comes along. The seller must take the home off the market and proceed with the sale.
The active offer with bump – This wording on a property listing means that the seller has accepted an offer and has the right to accept another offer.
CTG – You also might see the abbreviation “CTG” for “Contingent” in a property listing. This status means that the property is on the market until the seller learns that buyer has either waived or satisfied a contingency.
Many real estate experts describe a bump clause as a kind of security blanket for home sellers. The main advantage of a bump clause is that it allows a seller to continue listing the home throughout the contingency period. The seller may get a cash offer or one without any contingencies.
However, in a cooling housing market, a better bid may not materialize. So, a bump clause protects the seller from losing out on a perfectly good offer.
Most home buyers cannot secure financing for a second home prior to selling their current one. But waiting to shop for a new home until your current one sells can be awkward at best. The bump clause is a good solution in a cool seller’s market.
Also, a bump clause may help convince a seller with an unrealistic home listing price to accept a reasonable offer.
Sellers with bump clauses should be careful about jumping into a second “better” offer. After all, bigger isn’t always better. Ensure that the second buyer has good credit and mortgage pre-approval, or else you could be bumping a solid buyer for a less-qualified one.
Another potential problem is that some qualified buyers will stay away from contracts with bump clauses. They may prefer not to take the risk of getting bumped when their current home is about to sell.
It’s always a good idea to evaluate your local real estate market, weighing the pros and cons carefully before including a bump clause.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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