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Should your real estate client agree to a bump clause?

By July 12, 2018 No Comments
Should your real estate client agree to a bump clause?
REPOSTED DIRECTLY FROM INMAN NEWS. THIS CONTENT HAS NOT BEEN MODERATED BY WFG NATIONAL TITLE.

Do you have a buyer who has a home-sale or finance contingency? Is your listing failing to gain or maintain attention? Then you may want to consider adding a bump clause (also known as a release or kick out clause) to your contract.

According to an article by The Wall Street Journal, a bump clause allows sellers to enter a contract with a buyer while continuing to market the home and consider other offers. If the sellers find a better offer, they’re able to “bump” the first buyer and take the new offer instead.

Brooklyn Law School professor David Reiss told WSJ that buyers and sellers consider utilizing a bump clause when there’s a home-sale contingency.

In this case, the buyers will agree to the clause, sign the contract and submit a down payment. From there, the buyers have a set number of days (30, 20, 14, etc.) to satisfy the contingency. If the sellers do find a better offer by the deadline, they must notify the original buyers and give the buyers the opportunity to say they’ve waived or satisfied the contingency.

If neither of those things happens, the sellers must return the down payment and terminate the contract before entering into another one.

Reiss also said the clause is gaining traction in transitional markets where home prices and home sales have started to taper, but seller expectations haven’t.

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,” he said, noting it could be “a savvy technique” to help sellers who feel they could still get a better offer.

In a thread on the Inman Coast to Coast Facebook page, Washington, D.C.-based agent and co-founder of Peer Reputation, Steven Wynands said there were some instances where he would’ve liked to use a bump clause, but it doesn’t always work out in practice because buyer’s agents tend to steer clear after a property’s status switches to “Pending.”

Just like The Wall Street Journal noted, Wynands said bump clauses often don’t work in hot markets such as his because sellers get multiple offers with no contingencies.

“We [listing agents] generally don’t accept those [bump clauses] in the D.C. area because the market is so tough,” he told Inman during a phone interview. “When you’re in a strong seller’s market, you’re not going to see that. Why would a seller accept an offer like that [with a home-sale contingency]?”

“There’s no guarantee,” Wynands added. “Everyone wants a sure thing. You don’t want to risk real money.”

But, he said listing agents may want to entertain the idea if they have a listing that’s growing stale. Before agreeing to the clause, Wynands said listing agents need to do their due diligence and tread lightly.

“A good listing agent will talk to the buyer’s agent and ask if they can view the buyer’s current home,” he said. “Need to know the condition and what the listing price will be and see if it’s competitive against the market. You want to make sure the buyer’s current home will sell.”

Of course, there’s always the risk the buyer won’t meet their contingency, and not only will your listing be stale, it’ll be stigmatized.

“As a listing agent, you never want the listing to become stale or stigmatized,” Wynands said. “Stigmatization can happen for various reasons, and it will happen if the home is under contract and then falls out of contract.”

“When you relist your property, it screams to buyers, ‘Oh no, there’s something wrong with it,’” he added.

On the other hand, buyer’s agents can use bump clauses to their advantage, beyond helping a buyer with a contingency. If you’ve had a hard time finding an available listing for your buyer, Wynands suggests going to the MLS and looking for pending lists with a bump or kick out (CKO) clause. You may be able to put up a better offer and “bump” the current buyer out of the way.

Example of a bump clause from the Kentucky Real Estate Commission.

If your buyer or seller wants to add a bump clause to the contract, never write it in yourself. Oklahoma City-based real estate lawyer Vance Nye says a lawyer needs to be brought into the transaction to write and review the terms of the clause so both sides can be covered.

“You have to be careful when drafting those,” he said while noting that bump clauses aren’t common because sellers would rather make a deal with a non-contingency buyer.

Nye said sellers need to consult a lawyer about the timeline the buyer will have to fulfill or waive the contingency, and what kind of offer another buyer would need to make — for example, all-cash — for the first buyer to be bumped. On the buyers’ side, the lawyer needs to make sure that the clause is written in such a way that if they cannot satisfy the contingency, they’ll get back any money they put down.

Email Marian McPherson.

The views and opinions of authors expressed in this publication do not necessarily state or reflect those of WFG National Title, its affiliated companies, or their respective management or personnel.

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