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Sellers are relying on "bump clauses" to fetch a better price on their homes

By Mike Wheatley | July 10, 2018

Sellers are increasingly adding in something known as a “bump clause” to their real estate transaction contracts, as a way of getting assurance that they’re receiving the best possible offer on their properties.

A bump clause allows sellers to enter into a contract with the buyer but still market their property, so that if they receive a better offer during the transaction period they can then tell the original buyers to “bump” up their offer or waive their contingency.

Bump clauses are often used when a contingency is involved in the original offers. Buyers may offer it to sellers to get them to accept their offer, which may have a contingency like selling a house first before proceeding with the purchase of the new one.

Should the seller not receive a better offer on their property that they wish to take, they are then required to notify the original buyer first. That buyer then has a short period of a few days in which they can decide to waive their contingency, otherwise the original contract is terminated. If that happens, the original buyer also receives back their earnest money, allowing the seller to enter into a contract with a new buyer.

Sellers can only continue to market their home until the buyer decided to satisfy or waive the contingency. Once that happens, the seller must refrain from marketing their home to new buyers.

Real estate professionals told the Wall Street Journal that such clauses are more popular in markets that previously saw rapid home sales but are now slowing down, and where most sellers haven’t yet adjusted their price expectations yet.

David Reiss, a Brooklyn Law School professor who specializes in real estate, told the Journal that the bump clause tactic can be a “savvy technique” for sellers as it gives them encouragement that they could still receive a better offer, while locking in a buyer.

The clause is often used as a negotiating tactic with other buyers who show an interest in the property, Reiss said. Sellers can use the clause to get other interested buyers to make a higher bid than the initial buyer, without contingencies.

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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