Bump Clauses: What are they and how to use them to your advantage

Bump Clause is one of those real estate terms that you may come across in a potential listing and think that it indicates a risk. As a broker, a bump clause can be a win-win for all parties involved.

What is a Bump Clause?

A bump clause allows sellers to enter into a contract with a buyer but continue to market the property. If the seller then receives a better offer, they can bump the original buyer to get them to waive their contingency or offer more. Practically speaking, this means that if a buyer needs to make their offer contingent on the sale of their primary residence in order to free up the equity and cash to go forward with the next transaction, the seller may choose to enact a bump clause. This gives them the opportunity to continue to market the property in online channels and continue to show the property.

If the seller does get another written offer, the buyer has a few days (the exact amount depends on the wording in your contract) to decide what to do. You can withdraw your offer or waive your contingency. If you terminate the contract (don’t buy the house), you’ll receive your earnest money back and the seller moves on with the contract with the new buyer.

How does the Bump Clause Work?

Let's look at an example. The Smith family has listed their home for sale. They received an offer right away from the Patel family- but the offer is contingent on the Patel's selling their residence. The Smith family takes the offer but is now waiting for the Patel's house to sell. It's not an incredibly pro-active place to be, so the Smith's continue to show their home and a few days later receive another offer from the Rodriguez family that is not contingent on a sale of another property. They use the bump clause to notify the Patel family that they'd like to move forward with a better (or cleaner in this case) offer. The Patel's then have a choice, they can choose to sweeten their offer, waive the contingency of the sale of their other home or choose to walk away from the deal.

What are the benefits to a Seller?

Sellers want reassurance that they’ll sell their home. In a slow market, they may hesitate to accept a contract with a contingency. If the sale falls through, then the seller is back at square one – not somewhere they want to be in a slow market. The bump clause gives sellers reassurance that they have an offer, but can keep looking for other buyers. It’s an insurance policy. They give you what you want (home sale contingency) while still marketing the property in the hopes of finding a buyer without a contingency. In the case of the Smith's family's home, when they accepted a contingent offer, they have little ability to affect the speed of the transaction. They don't control the pricing of the Patel's home, the marketing of the Patel's home or the urgency for the Patel's to accept an offer. They are going on faith that the Patel's do want to move forward with the Smith's purchase. The Bump Clause creates an urgency for all parties to move forward in good faith and some support for the Smith's in case a better situation presents itself.

So this begs the question, when would a seller take a bump clause? Simply put- when the offer is strong enough to warrant it.

What are the benefits to a Buyer?

The buyer often presents a bump clause to the seller in the hopes it will influence the seller to accept an offer with a contingency. Otherwise, trying to buy a home while selling your home at the same time can be a hardship. While the concept of a bump clause does not initially seem advantageous to the buyer, it can present opportunities not otherwise available.

The Best Time to Use a Bump Clause

Bump clauses do not always work, and they especially do not work when the market is hot. In a seller’s market, offers are coming in without contingencies. Consider your location and the state of the market in your area before considering a bump clause.