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In Cooling Housing Markets, The ‘Bump Clauses’ Returns With Benifits For Sellers And Buyers

The contingency-based clause coaxes some sellers by offering them the chance to continue marketing a property, while buyers are given time to sell existing homes.

What to do when a home-seller gets an offer but holds out hope for something better?

Enter the bump clause.

A bump clause lets sellers enter into a contract with a buyer while still continuing to market the property. If the sellers get a better deal, they can “bump” the original buyer.

It’s most commonly used when a buyer’s offer has some contingency, usually that they need to sell their current home first. It can help coax the sellers into contract by offering them the ability to seek alternate buyers who don’t have a home-sale contingency or who are offering higher prices.

The clause tends to become more popular in markets that are “transitional,” where once-hot home sales are cooling but sellers haven’t yet adjusted their expectations. The tactic can be “a savvy technique” to help the sellers feel they could still get a better offer, says David Reiss, a Brooklyn Law School professor who specializes in real estate.

If the sellers do get another written offer they want to take, they must notify the original buyer. The buyer then typically has a few days to tell the seller they’ve sold their house, or that they’ve decided to waive the contingency. If not, the original contract terminates. The original buyer gets back the money they put down, and the sellers enter into contract with the new buyer.

The sellers can only keep marketing the property until the buyers satisfy or waive the contingency. So once the buyers notify the seller they’ve sold their existing home, the seller’s right to market the property ends.

Rebekah Carver, a real-estate broker with Douglas Elliman Real Estate in Brooklyn, N.Y., says Brooklyn has been a hot market for a long time, and bump clauses haven’t been common. But now she’s representing buyers on a deal where the seller had resisted signing a contract with a home-sale contingency, even though the property had been on the market for about six months. Ms. Carver offered the bump clause to try to put the seller’s mind at ease.

In general, the bump clause can “give the seller some sense of security and comfort,” says Ms. Carver. The bump clause can be proposed by either the buyer’s or seller’s side, but is often offered by the buyer’s agent as a way to get the seller to accept a contingency.

At The Cascade Team when representing a seller facing a home-sale contingency, we empower our agents to do their due diligence. We want to do our own analysis of the potential buyers property  to be certain that it will sell quickly. Another factor is to vet the buyers via their lender and ensure all their financing is in place to navigate the two nearly consecutive transactions. Lastly, we often suggest the strategy of "Controlling The Contingency", which is building into the acceptance of the contingent offer "Pre-Determined Price Drops" of the buyers property to ensure their sale to facility the purchase of our clients home. 

Knowing the bump clause is a possibility is comforting to a seller, but most of my clients still prefer an offer without the uncertainty of a closing on the other side in order to facilitate their purchase.

Here are some things to consider with bump clauses.

For sellers:

• Use it as leverage. Since the house is already under contract, a seller can use the clause as a negotiating tactic with any other buyers that show interest. The seller can try to get the other buyers to outbid the current price or negotiate a contract without contingencies.

• Don’t get greedy. If the seller receives a second offer, he may be tempted to “bump” the first buyer and sell to the second. But sellers should make sure the second offer is at least as strong as the first, which means looking deeper than price and contingencies. The new buyers may have poor credit, for example, and be less likely to obtain a mortgage. “It’s a bird in the hand,” says Mr. Reiss. “If they walk away and are stuck negotiating with a second offer that’s weak, they could end up with nothing.”

For buyers:

• Don’t make a hasty decision. Buyers who receive notice that there is a secondary offer may have only a few days to agree to waive a home-sale contingency, or face losing the deal. Unless they’re confident that their own home will sell, buyers should be careful about waiving the contingency. They risk losing the money they put down on the contract if they can’t proceed with the purchase.

• Pick an experienced negotiator. Find someone who is familiar with bump clauses. An agent needs to not only be familiar with the mechanics of how the clause works but also be able to establish a rapport with the listing agent and allay the seller’s fear of accepting the contingency.

The Cascade Team provides a full service experience that is a step above; by executing a marketing plan for your home that is technology rich and high in service.  We leverage all available technology tools to provide the most exposure possible for your home, and utilize those tools to increase the communication and service to you our client.

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