Purchasing a home is one of the most significant financial decisions an individual or family can make. While exciting, it also comes with a lot of paperwork and legal terminology. One term that homebuyers may come across in Wisconsin is a “bump clause.” I’ll explain what is a bump clause in WI, how they work, who benefits from them, and things to keep in mind when reviewing real estate contracts containing them.
What is a Bump Clause?
A bump clause is a conditional clause found in some Wisconsin real estate purchase contracts. It allows the seller to continue marketing the home while under contract and accept a higher offer from another buyer.
If this happens, the original buyer gets the chance to match or “bump” the new offer and continue with the sale. Otherwise, the seller can terminate the initial contract and move forward with the new buyer – hence the name “bump clause.” If you want to know more, read what does active offer no bump mean.
How Do Bump Clauses Work?
Here is a step-by-step overview of how bump clauses normally operate in Wisconsin real estate contracts:
- The seller lists the home for sale and accepts an offer from the first prospective buyer (Buyer A). This offer includes a bump clause.
- After accepting Buyer A’s offer, the seller keeps listing and showing the property to other buyers.
- Another buyer (Buyer B) makes a higher offer than Buyer A’s original offer. This triggers the bump clause.
- The seller notifies Buyer A that they intend to accept the new offer from Buyer B.
- Buyer A then has a short window specified in the contract (usually 24-48 hours) to match or exceed Buyer B’s offer. This is their chance to “bump” the new buyer from the deal.
- If Buyer A declines or cannot match the new offer, the seller terminates the contract with Buyer A. The property sale moves forward with Buyer B.
- If Buyer A does match or exceed the new offer, their original contract remains valid. The bump clause is satisfied, and Buyer B’s offer is void.
So in short, the bump clause gives the seller an “out” if they receive a better deal. But it gives the original buyer first right of refusal to match or beat the new terms.
Who Does a Bump Clause Benefit?
Bump clauses are primarily drafted to benefit the seller:
- It allows them to capitalize on any competing offers that come in at a higher price. This maximizes their profits from the home sale.
- It reduces the seller’s risk if market values increase after accepting the original offer. They can still take advantage of the newer, more favorable market price.
- It gives the seller an easy way out if they receive a more appealing offer from another party, without breaching the first contract.
However, a bump clause can also benefit the original buyer in some cases:
- It secures the buyer’s place as the current accepted offer, as long as they are able to match any new terms.
- It can act as a motivator for the buyer to put their best offer forward from the very beginning, to avoid getting bumped later.
- The buyer may end up purchasing the home below subsequent market value if prices increase and no new offers come in.
Overall though, the clause definitely caters more to sellers and allows them to maximize the sale value. Buyers should keep this in mind during negotiations.
Important Things to Note About Bump Clauses
When reviewing contracts with bump clauses, there are some key considerations for buyers:
- Bump window time frame – Make sure you understand how long you have to match or beat the new offer once notified (usually 24-48 hours). This critical window is spelled out in the clause.
- Bump price limit – Some bump clauses cap how much higher the new offer must be to trigger the clause. This protects the buyer from getting bumped over small incremental increases.
- Number of bumps allowed – Contracts sometimes limit the number of times the seller can invoke the bump clause. This prevents endless bump scenarios.
- Notification method – Check how you will be notified of a new offer (email, phone call, certified mail etc). You don’t want to miss your match window because of a communication breakdown.
- Earnest money – If bumped, make sure you get your existing earnest money deposit returned promptly after terminating the initial contract.
- Inspection contingencies – You may want inspection out-clauses even after matching a new offer, in case issues are uncovered.
- Bump clause removal – Try to negotiate the clause removal if the home hasn’t sold by a certain date (30-60 days out).
Strategies for Buyers on Bump Clause Contracts
As the buyer, you have less power than the seller regarding bump clauses. But there are still a few strategies to employ:
- Put your strongest offer forward from the start, so you have less chance of getting bumped later. Consider exceeding list price or limiting contingencies.
- Negotiate the bump terms – try to limit number of bumps, increase match window, cap bump price increment etc.
- If seller insists on a bump clause, ask for concessions like closing cost assistance to offset your risk.
- Don’t waive inspection/appraisal contingencies when matching an offer, to protect yourself.
- Move quickly once notified of a bump, so you don’t miss the match window while scrambling for funds.
- Be prepared to walk away if you can’t match a new offer or no longer want the home. Don’t get emotionally invested.
- If continually getting bumped, re-evaluate your approach and offer terms. Consider focusing your search on homes without bump clauses.
The most important thing is understanding the implications before agreeing to a bump clause. Know the seller has the upper hand, but you still have some protections and options as the buyer.
Bump Clauses vs. Escalation Clauses
Bump clauses are sometimes confused with escalation clauses, but they operate differently:
- Escalation clauses automatically increase a buyer’s offer incrementally in response to higher offers received by the seller. The buyer doesn’t have to manually match or beat the new price.
- Bump clauses require the original buyer to take action and manually match or exceed the new offer themselves within the match window. Their offer price does not automatically escalate.
- Escalation clauses demonstrate the buyer’s maximum willingness and ability to pay. Bump clauses require re-verification of funds and approval from the buyer.
- Escalation clauses favor buyers more. Bump clauses are better for sellers.
So bump clauses give more power and control to sellers over each offer, rather than automatically escalating the price like an escalation clause would. Make sure you know which type of clause is in your contract.
Are Bump Clauses Legal in Wisconsin?
Yes, bump clauses are legal and enforceable in Wisconsin real estate contracts, as long as they are mutual agreements between a willing buyer and seller.
Some key points on their legality:
- Contingent sales – Bump clauses allow sellers to accept backup offers, while keeping the first buyer’s offer in play. This is important, as outright dual contracting is illegal in Wisconsin.
- Transparency – The process must be transparent, with proper notifications made in good faith to honor contractual obligations.
- Termination method – Proper termination of the initial contract must follow bump clause conditions if invoked. Sellers can’t unlawfully back out.
- Fair housing – Bump clauses cannot be exercised in a discriminatory manner against protected classes. Fair housing laws still apply.
While legally allowed, some buyers may still feel bump clauses are unfair or coercive. But courts uphold them as long as the contractual terms are followed. Everyone should understand the implications before signing.
Are Bump Clauses Common in Wisconsin?
Bump clauses have become relatively common in Wisconsin real estate purchase contracts over the last 5-10 years as the market has grown more competitive.
Some key reasons for their proliferation:
- Low housing inventory and excess buyer demand pushes sellers to maximize sale prices. Bump clauses allow this.
- Fierce bidding wars for desirable homes incentivize sellers to consider back-up offers after accepting an initial one.
- Rising home values make it appealing for sellers to leave open the option for a better deal later.
- Digital listing sites like Zillow make it easier to keep marketing homes as “contingent” after accepting an offer.
However, bump clauses are still more common in hot markets like Madison and suburban Milwaukee. In rural areas with less competition, they are rarely seen.
As Wisconsin’s market cools slightly in 2023, bump clauses may decrease but are unlikely to disappear entirely. Savvy sellers will continue utilizing them when possible.
Alternatives to Bump Clauses
Some alternative options exist for both buyers and sellers instead of agreeing to a bump clause:
For Buyers:
- Refuse contracts with bump clauses and only make offers on homes without them.
- Require the seller to stop marketing/showing the home once your offer is accepted.
- Ask for a first right of refusal on any new offers instead of a bump clause.
- Include an escalation clause with a price cap rather than subject yourself to unlimited bumps.
For Sellers:
- Assess all offers fully before accepting one, rather than accepting then waiting for a better one.
- Include a short contingency period for new offers rather than an unlimited bump clause timeframe.
- Counter at the highest price you’re willing to accept rather than risk losing a good offer that comes in first.
- Require bidders submit highest and best offers by a set date, rather than piecemeal.
FAQs
What happens if a buyer doesn’t bump the new offer?
If the buyer doesn’t match or exceed the new offer within the specified timeframe, the seller can terminate the initial contract and proceed with the new buyer.
What if a buyer matches, but the seller gets yet another higher offer?
The bump clause process would repeat. The seller has to again notify the original buyer and give them the chance to match this third offer and “re-bump” the new prospective buyer.
Can a bump clause allow for the seller to keep the home listed indefinitely?
No, most bump clauses place reasonable time limits, such as 30-60 days after contract. At that point the home must be taken off the market if not sold.
Is a bump clause different from a backup offer?
Yes. A true backup offer only goes into effect if the first offer falls through. A bump clause allows the seller to consider a new higher offer even with the first one still valid.
Can buyers ever withdraw their offer if they don’t want to match a bump?
Yes, buyers can decide not to match a new offer per their right in the bump clause. This would terminate the contract so they can walk away. Their earnest money should be returned.
Does a bump clause give sellers the right to back out anytime for any reason?
No, sellers cannot unlawfully break a contract just because it contains a bump clause. Valid bump terms must be followed or the seller could face legal action.
Conclusion
Bump clauses give Wisconsin home sellers flexibility to maximize sale prices, while still protecting the original buyer’s ability to match better offers. As a buyer, understand the implications before agreeing to a contract with one. Real estate, hailed as the ultimate investment choice, offers a wealth of opportunities for astute investors. To maximize your advantage in this dynamic market, strategize on your offer terms, negotiate where possible, and be prepared to act quickly if a bump situation arises. While not ideal for buyers, bump clauses are legal if exercised properly, underscoring the importance of knowing your rights, risks, and options before signing such an agreement.