Every real estate transaction involves risk, whether you are the buyer or the seller. And during a real estate transaction, either party can include specific contingencies to help mitigate some of the risks. Common contingencies may allow either party to back out of a contract if specified conditions are not met, such as:
- A satisfactory home inspection
- A home appraisal that meets or exceeds the purchase price
- Final approval of the buyer’s home loan
If you’re thinking about or in the process of selling a home, another contingency worth considering to add is called a kick-out clause.
Here’s what you need to know about kick-out clauses in real estate.
What Is A Kick-Out Clause?
A kick-out clause is a type of contingency in a real estate purchase agreement. A contingency is a condition that must be met in order to go through with a sale. A kick-out clause impacts buyers and sellers differently.
How a kick-out clause affects sellers: A kick-out clause permits sellers to continue to market their home to other potential buyers in the event that they receive an offer with contingencies. Typically, this clause would be added when the homebuyer still needs to sell their current house in order to purchase your house. The kick-out clause makes it possible for you to kick that initial buyer’s offer out in case another, more preferable offer comes in from a second buyer.
If the seller gets another offer without contingencies, the current buyer is notified and must then either remove the contingencies from the purchase agreement and proceed to closing, or walk away from the sale and allow the seller to move forward with the other buyer.
The good: The seller can continue to actively market their house, seeking a better offer. If a second offer does come in, the seller also maintains a strong negotiating position because there’s already an existing offer
The bad: If the home seller chooses to use the kick-out clause and goes with an offer from another buyer, they risk that buyer backing out or the deal falling through. The seller would have to re-list the house, which can be time-consuming and further delay their ability to move on to their next home.
How a kick-out clause affects buyers: When you make a contingent offer within a kick-out clause, you must sell your home within the specified amount of time or risk losing the home to another buyer.
The good: The kick-out clause prevents a buyer from carrying two mortgages since they must first sell their first house before buying another one. This may also help the buyer reconsider if they can afford the new home or if the new mortgage may be a stretch without a sizable downpayment.
The bad: A buyer could lose the house they want to another buyer with a better offer while they are waiting to sell their current house. In a hot real estate market, sellers may not want to accept a contingency with a kick-out clause.
Kick-out clauses are more common in buyer’s markets than seller’s markets because sellers want to ensure that they aren’t stuck in a drawn-out, lengthy home sale.
Why Include A Kick-Out Clause In A Sales Contract?
Sellers want kick-out clauses so that they can continue to market, show and ultimately accept offers without the contingencies they agreed to with the original buyer. Buyers might prefer a kick-out clause to a straight rejection of their offer.
The original buyer will have a certain period of time to remove the contingency. If the first buyer sells their original home within the contingency timeframe, the kick-out clause disappears and the seller can no longer market the house to other buyers.
Sellers may be able to give the buyer a certain amount of time to drop the contingency and proceed with the sale, typically 48-72 hours. If they can’t make it happen within that amount of time, the seller can kick them out of escrow.
How Does A Kick-Out Clause Work?
When sellers enter into a purchase agreement with contingencies and a kick-out clause with buyers, they may continue marketing their property. Here are a few more details on how a kick-out clause actually works.
- The buyer submits their purchase offer and includes a home sale contingency making their purchase subject to the sale of their existing home. The home sale contingency includes a home sale contingency period. The period depends on market conditions and can range from 30 to 90 days. During this time, the seller can still continue to show the house.
- The seller must notify the first buyer in writing if an offer comes along from a second buyer with terms that are acceptable and justify invoking the kick-out clause. Most purchase agreements allow buyers 72 hours to either remove the contingency or walk away from the sale with their earnest money. These agreements can also be structured to allow the original buyer to match a subsequent offer.
- Once the buyer knows about the second offer, the buyer must decide whether to purchase the seller’s house without selling their own house or cancel the contract.
- If the first buyer decides to continue with the purchase, closing usually occurs within 30-45 days of the buyer’s decision to proceed.
- If the first buyer decides not to proceed because the first buyer has not sold their original house, the contract between the seller and the first buyer is canceled. The seller is then free to enter into a contract with the second buyer. The first buyer’s earnest deposit money is typically returned.
Here’s an example: Let’s say a buyer submits an offer for $300,000 on a home subject to satisfactory inspection, financing and appraisal. The seller counters accepting the terms but adding a kick-out clause with a 72-hour clause. Seven days later another buyer comes along and offers $305,000 subject to financing but as-is. The original buyer now has 72 hours to release their contingencies and increase their offer to $305,000 or their contract terminates allowing the seller to move forward with the second buyer.
Another example: Let’s say that a buyer must sell their current home before they buy a replacement property. They put an offer on a particular home contingent on the sale of their current home. However, another buyer comes along who can buy a home without waiting for their other house to sell. That buyer puts an offer on the house as well. The first buyer has 72 hours to either walk away from the sale or come up with the money to pay for the home.
What Happens If The Buyers Agree To Remove The Contingency?
The buyers may agree to remove the contingency, and in that case, the sellers are bound to the original offer.
However, sellers might want to include language in the kick-out clause to state that buyers can remove the contingency but must prove they can secure financing for the loan to purchase the home. If the purchasers cannot prove they can move forward financially, then the seller can walk away from the contract.
What Happens If The Buyers Decide To Walk Away?
If the buyers remove the kick-out-period after 72 hours, they can still walk away from the contract based on another contingency that has not been met. The buyer still can find an excuse to back out of the contract, based on another contingency in the contract. If the buyers decide to walk away from the home, the sellers are free to enter into a new contract with the party who made the second offer.
Buyers should be sure to include language about the return of all earnest money paid at the time the sales contract is signed.
For example, here’s how it might read: “Both parties agree that the sellers’ property shall remain on the market during the contingency period. If the buyer does not remove the above contingency and provide evidence to the seller of their ability to perform under the terms within [number of hours] after receipt of written notice that seller has accepted a secondary contract, the buyer’s earnest money shall be promptly returned in full.”
Can Kick-Out Clauses Cause Any Unintended Consequences?
Kick-out clauses can cause unintended consequences. Here are a few:
- Houses actively marketed with a kick-out clause can make the home unattractive to some buyers who realize they will have to compete with an existing buyer who may have a chance to match their offer.
- The second buyer’s offer could fall through. If this were to happen, the seller would have lost out on both offers and be forced to re-list their property.
How to avoid a kick-out clause
As a buyer, finding the home of your dreams only to have it taken out from under you can be heartbreaking. To avoid the pain and loss of time invested in the deal, a buyer can take steps to avoid the need for a kick-out clause.
- As a buyer, you can sell your house first and move into temporary housing, either a month-to-month rental or other short-term accommodations. You’ll already be in a good position to make an offer on the next house, with no need for a kick-out clause. Yes, there is an extra move involved, but you won’t get bumped from purchasing a home you love.
- If you need the equity from your current home to buy the new home, there are workarounds. You can work with a third-party lender to provide bridge financing to underwrite your next home. When your first home sells, you can then pay the money back.
The problem with home sale contingent offers
The problem with a home sale contingent offer from a seller’s perspective is there is no guarantee when, or if the buyer’s current home will sell. As such, in a seller’s market an offer with a home sale contingency typically goes to the bottom of the pile of other offers. If a seller receives multiple competitive offers, any buyer’s offer with such a clause is unlikely to be considered.
The kick-out clause can protect both the buyer and seller from entering into a real estate deal that is not beneficial for either party. Depending on how long it might take for the buyer’s current home to sell, or the seller’s likelihood of receiving additional offers, both buyer and seller have some thinking to do before proceeding with a transaction. Consult with your real estate agent if you have any questions before deciding whether to use a kick-out clause.
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