Hey everybody! It’s Austin Solomon with The Solomon Group at Coldwell Banker. Welcome to this week’s episode of The Real, Wausau’s Real Estate Show. Today we’re talking about what is a bump clause.
If you’re selling a house or buying a home, and if you’re going to use the approach of making an offer subject to your home selling, you’re going to want to know what a bump clause is.
Where we commonly see this is, I’m going to use an example, if the owner of $150,000 house wants to purchase a $300,000 house, but needs to sell their home first, that’s when you’re going to see this verbiage around this bump clause.
So the offer is made and again that $150,000 buyer is telling the seller I’ll buy your home as long as my home sells by this date, for example 60 days out. So, when that offer comes in, the $300,000 seller, the house that the buyer is looking to purchase, the seller is thinking, “ok, I like having this offer, they gave me this offer which is great. But what happens if this $150,000 house doesn’t sell, what happens if I wait 60 days for them to sell and they don’t sell it. I could lose all that time on the market and I might be back to square one in 60 days if their home doesn’t sell.”
Ok, enter the bump clause!
The bump clause, what that allows the seller to do, is mitigate some of that risk associated with that first buyer and mitigate that risk around that first buyer’s home not selling. So instead of taking their home completely off the market during that 60 period when that $150,000 homeowner is trying to sell their house, instead of doing that what they can do is continue to market it and show it to other prospective buyers during that time and if another offer comes in and the seller likes that offer better, the seller can effectively go back to the first buyer, request they remove the home sale contingency and if they can’t, the seller can make the second offer primary. That’s what the basic bump clause is.
So again, just to recap. The $150,000 homeowner looks to buy that $300,000 house. They say hey I’ll take that house but I have to sell my house first, let’s do closing in 60 days. For that $300,000 homeowner that’s a lot of risk to wait 60 days, so they might say yeah we can make this work, but in the meantime I’m going to continue to market the home and if someone comes in with a really good offer and they don’t have to sell a house, I’m going to come back to you and ask you to remove your home sale contingency otherwise I’m going to go the other direction.
So that’s a basic bump clause. You might be thinking, why would the buyer allow themselves to be bumped?
So if they made an offer why would they need that bump clause? Why would they allow themselves to be potentially bumped from the offer? Well if it’s not in there, then the seller may not be able to entertain it because again they’re closing is out 60 days without any guarantees.
So the bump removes some of the risk for the sellers waiting for the buyers to sell their home, while the seller still has the option to market and show the house and sell the home to another party.
Let me give you an example of what that’d look like. So again, $150K person says, hey $300K home I’ll take it subject to my house selling. And then a week later a cash buyer comes in and says I’ll give you $320K for your house. The seller says holy cow, I’ll take that! Well the seller can’t just bump the other party, they have to go back to the $150K buyer and say we had another offer come in, you have to remove your home sale contingency and potentially provide more information or documentation, depending on what’s in the offer, and if you don’t, then I’m going with this other offer.
If the buyer at that point says, you know, we really don’t want to but I’m going to swing both homes, forget about my home sale, we can come up with a bridge loan or we can come up with the cash to purchase your home without your house selling. Then, at that point, that $150K buyer might say, we’re moving forward regardless if our home sells or not. Then that $300K home seller, they have to move forward with those first buyers, they have to tell the $320K cash offer that they removed their home sale contingency and we can’t make you primary at this time.
Ok, that’s what a bump is! Here’s a couple of tips if you’re making an offer with a bump clause, as a buyer, here are a couple of tips.
You want to specify in the offer and let the seller know that… let them know what you’re selling. For example, let them know you have this kind of house and we’re going to be pricing it at X and we think it’ll be selling quickly. That just provides some context for all parties. Set a price and be prepared so that when you are making that offer, the other agent, the seller, can be comfortable.
Also, in the offer, you’ll want to specify that once you get an accepted offer on that $150K house, a pending offer, the seller can no longer bump you. That’s a good strategy. Once they accept an offer or once you market your home and get an accepted offer on your home at $150K, then the seller can’t use that bump clause to move you out. So, a strong agent and some verbiage will take care of that. So, that’s a tip!
Again, you might even throw something in the offer that says hey, we’re going to have our house listed for a price no more than X within 7 days with a Realtor. It shows you’re ready to rock and roll, you’re motivated and you’re ready to make things happen. Sellers don’t really like home sale contingencies, but again, if you have some of these tips, it can certainly help.
Tips for sellers! Now, on the selling end, let’s say you have a… really any scale of home, it could be $100K, $200K, $300K, $400K you tend to see more home sale contingencies when you get into that upper price point. But the tips for sellers are when you’re looking at a bump, you want to make sure the agent checks into the home they are selling to make sure it’s saleable and what price they’re listing it at. The last thing you want to do is accept an offer and then the owners put the home for sale at a crazy price, that could be problematic. Number 2 is that you request, in the case that they buyers are bumped, provide proof they can purchase your home without selling.
In our example, if the seller of the $300K house, if another offer comes in, you’ll want to be able to go back to that first buyer and tell them definitively, you’ll need to remove your home sale contingency and provide us proof that you can purchase my house without your home selling, otherwise I’m going with this other offer. You don’t want to leave it up to interpretation, so you want to have a clear game plan if another offer does come in.
Here’s just something to know as well around the bump, if you’re a seller, if you accept an offer with a home sale contingency, the status of the home has to change as a result of that. So it would say ‘Active – with Bump’. Sometimes having that extra piece in the status, as a buyer looking says this one has a status of active with a bump. The agent and the buyer would know that there is still a potential option it’s open and you could still purchase the house, but there’s a lot more work that goes into that and because there’s a chance those primary buyers could remove that home sale contingency, that buyer that sees that might say they don’t want to go through that hassle versus a house that just hit the market and doesn’t have any other offers.
So, sometimes that status can slow down showings, there’s a term in Realty, sometimes called the kiss of death, referring to the home sale contingency in what it can effect in regards to the amount of showing activity. So, that’s just something you have to weigh though. On the same token too, accepting an offer with a home sale contingency works out a lot of times and we do it all the time. And it’s another option for you to help get your home sold and oftentimes a good option.
So, yeah! That’s what a home sale contingency and a bump clause is. Those are some tips for buyers and sellers when you have a home to sell, or if you’re looking to purchase and you have to sell your house as a part of the purchase. Hopefully that’s helpful! If you guys have any questions about this, feel free to let me know.
This is one area there is quite a bit of confusion and can be tricky to explain, so if you guys need anything just drop me a note, I’d love to help you!
Thanks so much guys! We’ll catch you on next week’s episode of the show.
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Austin Solomon | The Solomon Group – Coldwell Banker Action – (715) 212-4693