Bump Clauses 101 | MoneyTips

You’ve set up a lame date for the upcoming weekend but you’re hoping a better offer comes along. If one does, you’re ready to accept it and cancel your earlier date. You’re hedging your bets, so you won’t be sitting home alone on Saturday night.

That logic applies to real estate transactions as well. Perhaps you’ve received an offer for your home that’s disappointing, but you expect a better offer to come along. Maybe you want to make an offer on a home but you need to sell your existing home to make the deal work financially.

In the real estate world, you can address these issues with a bump clause.

A bump clause in a real estate transaction adds a contingency that one party must meet before the sale can be finalized. Bump clauses get their name because the clauses give the seller the right to accept another offer and “bump” the original offer if the buyer can’t meet the contingency terms. With a bump clause, both sides understand the length of time the contingency is valid and what happens if the contingency is not met.

Bump clauses are typically used to outline terms for home-sale contingencies. When a buyer must sell their home to be able to afford a new one, they can make their offer contingent on the sale of their existing home. Home sellers are unlikely to accept an open-ended contract that keeps their property in limbo while waiting for the buyer to fulfill that obligation.

To entice a seller, a buyer may have to include a bump clause that gives the seller the opportunity to keep searching for better deals while giving the buyer the first opportunity to close the original deal. Conversely, the seller may suggest the clause as the condition under which they will accept the buyer’s offer.

Once the contract is signed and the buyer has submitted a down payment, the buyer has a set number of days to meet the contingency and fulfill the contract. If the seller gets a better offer during that period, the seller must notify the buyer and give the buyer the opportunity to either meet the contingency or waive it.

If the buyer waives or meets the contingency, the transaction can proceed as planned. If the buyer can’t satisfy the contingency and won’t waive it within a set time frame as defined by the bump clause, the seller may accept the other offer and reject the original buyer’s offer.

What happens if the contingency period passes without action on either side? Before sellers can enter into a different contract, they must end the contract with the original buyer and return the down payment funds.

Both sides have the potential for harm with a bump clause. Sellers may be too quick to bump an initial offer only to have the second offer fall through (the equivalent of Saturday night alone in the dating analogy). Buyers run the risk of potentially losing their down payment money depending on the terms of the bump clause.

Bump clauses can be a useful tool for adding wiggle room to a real estate contract while making the terms clear to both parties. If you need the latitude, consult with a suitable real-estate professional to include the proper clause in your contract – and if you are offered a contract including a bump clause, make sure you fully understand the terms of the clause and are comfortable with them before signing.

As for your social life, use bump clauses at your own risk.

MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.

Photo ©iStockphoto.com/demaerre

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