A kick-out clause contingency in a home sale contract can benefit both buyers and sellers, but they do come with risks. Understand what it is and how to make one work for you. —-
Reading home sale contracts can often feel like learning an entirely new language. If you’ve never purchased a home before, the terminology and legalese can be confusing and overwhelming.
There’s a lot to understand and consider, often in a short amount of time as you list your home or are looking to make an offer on a home. Perhaps you’ve fallen in love with a home that’s under contract with a kick-out clause. Or maybe you’re selling your home and a buyer’s submitted an offer that includes one.
Whatever the case may be, as with most details in a home sale, it’s good practice to speak to a qualified agent or real estate professional to understand your options. But we’ve done some of the initial research for you and interviewed several experts about the ins and outs of kick-out clauses. Let’s dive in and demystify what they are, how they’re used, and their benefits and risks to both the buyer and seller in a real estate transaction.
Kick-out clauses, explained
In its simplest definition, a kick-out clause is a type of contingency. A contingency is a particular condition that must be met in order for the home sale contract to close.
A kick-out clause allows the seller to continue to market the property and “kick out” a buyer with contingencies if another buyer makes a better offer.
“It typically comes up when they’re [the buyer] contingent, when they have a home to sell that they may have listed,” says Ruth Wordelman, a Colorado Springs, Colorado, agent who sells 77% more homes than other agents in the area.
A kick-out clause gives the seller a way out of the contract if the buyer is unable to sell their current home. Typically the seller will also be able to continue marketing and showing the property – in some cases they’ll even accept back-up offers depending on the location.
If the buyer doesn’t sell their home, or if the seller receives a better offer (more on this in a bit), they can effectively “kick out” the buyer from the contract and proceed with another offer.
You’ll see more kick-out clauses in a buyer’s market with a healthy housing inventory, where a seller’s more likely to accept a contingent offer. Conversely, in a seller’s market, contingencies are less likely to be accepted when a listing is receiving multiple competing offers.
How a kick-out clause works in a home sale
If you’re a homebuyer, you’ll want to put your best foot forward and make an offer that’s as strong as possible.
But sometimes, it’s not possible to forgo contingencies and you need to get your current house sold while you’re shopping for another one. A kick-out clause may be in order. Here’s how it works in the transaction:
The buyer requests a home sale contingency from the seller: They’ll ask for a certain amount of time – 30, 60, or 90 days are common – and the agreed-upon timeframe will be added to the contract. This is also called the home contingency period.
“Maybe it’s contingent on them [buyer] getting under contract, but it could be contingent on them actually closing on their property. Those are defined at the time of the contract,” says Wordelman.
The clock starts ticking: If the buyer sells their existing home within the contingency period, the purchase agreement proceeds and they’ll close on the seller’s home.
If the buyer’s existing home doesn’t sell and/or if the seller receives a better offer: This triggers the kick-out clause, which means the seller will notify the first buyer of the second offer. At that time, the first buyer has two choices and must decide quickly (72 hours is typical, though the exact time frame should be written into the contract): either remove the contingency and proceed with the purchase of the seller’s home or walk away from the purchase and void the contract.
“If they [seller] get a better offer, you could be kicked out of the contract if you cannot remove that contingency, if you can’t find supplemental financing so that it isn’t contingent on the home sale,” says Wordelman.
The seller moves forward with the second buyer’s offer: The first buyer is eligible to receive their earnest money back, as long as it’s stipulated in the contract.
Advantages of using a kick-out clause
There are pros and cons to kick-out clauses, but they’re different for the seller and buyer. “It all of course starts upon who has the most leverage in the deal,” says Scott Smiler, real estate attorney and partner at Gallet, Dreyer & Berkey in New York, who represents both buyers and sellers in property transactions. Understand what’s at stake and your level of risk before you sign the dotted line.
Benefits for the buyer
As a buyer with a home to sell, you can make your offer more attractive and likely to get accepted with a kick-out clause.
It provides you with time to sell your current property while under contract for another home. Perhaps even more significant, it keeps you from having to assume and pay two mortgages if it’s taking longer than anticipated to sell your existing home.
Benefits for the seller
As a seller, you’ll have the peace of mind of having your home under contract with the ability to continue showing it to prospective buyers. The kick-out clause provides a way out of the contract in the event the buyer’s unable to sell their home in a reasonable amount of time.
It also provides a way to void the contract if a better offer comes around. For example, if a second buyer offers more for the home or is paying with cash, a kick-out clause may come in handy. You would notify the first buyer of the second offer, at which point they would have 72 hours (or whatever time frame specified in the contract) to remove the contingency or cancel the contract.
Kick-out clause drawbacks
Kick-out clauses can come with some uncertainty and risk, which is why it’s important to understand what’s at stake for all parties involved.
Disadvantages for the buyer
A home sale contingency could weaken your position if you’re a buyer, especially in a hot real estate market where homes are receiving multiple offers. Simply put, it’s tough to compete in a seller’s market with contingencies.
“There are a lot of people who would like to have a chocolate and vanilla deal rather than a rocky road deal. The less contingencies from a seller’s perspective, the better,” says Smiler.
A kick-out clause is a compromise that could benefit buyer and seller, but a seller’s less likely to accept one if they’ve received competing contingent-free offers.
Unfortunately the risk doesn’t end there. Because the seller may continue marketing their property while it’s under contract, there’s a possibility you may get kicked out of the deal if they receive a better offer or if you’re unable to sell your current home in the time specified. You’ll have the option to remove the contingency and proceed with the purchase, but you may be responsible for two mortgages until your home sells.
Disadvantages for the seller
Accepting a contingent offer with a kick-out clause comes with some financial risk if you’re a seller. For one, other buyers who are interested in your home may hesitate to submit an offer if it’s already under contract with a kick-out clause. They could potentially be put off knowing that their offer could be matched or even beat by the first buyer.
“Some buyers are going to be reluctant to waste their time on a deal that is encumbered,” says Smiler. “There’s plan A, and if you’re plan B — not a lot of people like to deal with plan B, so it might be better to look at some other homes than to even get involved in these kick-outs that may or may not happen.”
Another possible pitfall is if the first buyer can’t sell their home and they back out of the deal, you may be left with an unpredictable back-up offer. For whatever reason, if the second buyer’s unable to proceed with the purchase, you’re essentially starting from square one.
Don’t kick-out clause alone
There’s a lot of coordination and communication between both parties so a home sale results in a successful and relatively stress-free transaction. While you could do it yourself, negotiating a kick-out clause may be better left to an experienced real estate agent or attorney to protect your interests and minimize your financial risk.
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