Real estate contracts tend to be buyer friendly. But there are some arrangements — like the kick-out clause — that give sellers more control over the contingency period. —-
As any seller would be, you’re thrilled when an offer comes in for your property — but that excitement fades when you find out it’s contingent on the sale of the buyer’s home. What if their house takes weeks or months to sell and you’re left waiting indefinitely?
You’re hesitant to put all of your proverbial eggs in one buyer’s basket when the sale might never actually happen. Then again, their house could sell quickly, and you don’t want to run the risk of missing out on a successful deal.
That’s where the “kick-out clause” comes in.
Generally speaking, real estate contracts tend to be crafted in a buyer-friendly manner. But there are some elements — like the kick-out clause — that give sellers a little more control over the contingency period in particular.
A closer look at contingencies
Before diving into the ins and outs of the kick-out clause, let’s talk a little bit about contract contingencies. In real estate, a “contingent” offer means that one or both parties have requested certain provisions before the deal closes.
According to the National Association of Realtors (NAR), 76% of contracts had contingencies of some sort as of May 2020. It’s standard for homebuyers to pencil in these escape hatches in the event that the home fails to appraise, an issue crops up with the title, or if they’re unhappy with the results of the inspection.
In addition, some buyers (about 6% according to NAR’s most recent measure) will add a contingency to accommodate the fact that they need to sell their current home before purchasing yours. This is called the “home sale” contingency.
With this type of contingency, the sales contract will state something like “the buyer will officially purchase the home on or before mm/dd/yyyy if they’ve sold their home.” If their home hasn’t sold when that date rolls around, the sales contract is cancelled.
One of the biggest risks associated with this type of offer is when there are two or three home purchases that are all contingent on the sale of another property. For example, if the sale of your buyer’s home is also contingent on the sale of their buyer’s home, and then their buyer’s mortgage falls through — the domino effect can send you back to square one.
An ideal situation would be to receive an offer without a home sale contingency. Those typically come from a buyer who has already sold their home, who doesn’t have an existing home to sell, or who doesn’t need the cash from their existing home to qualify for their next purchase. You’ll also deal with far fewer of these contingencies if you were to request a cash offer on your home from a direct real estate buyer.
Protecting yourself with a kick-out clause
If you choose to accept a contingent offer, your agent can add a kick-out clause to the sales contract that gives you the right to continue marketing and showing the house during the contingency period. That way, if you receive another offer, the original buyer will have a certain period of time to remove the contingency. If they can’t or don’t remove it before the deadline, you can “kick out” the first buyer and accept the new one.
If the first buyer sells their current home within the contingency timeframe, the kick-out clause is extinguished and you can no longer market the house to other buyers.
Tami Pardee, a top agent in Los Angeles, California, is a big advocate of the kick-out clause. She adds one to every contract she writes, even if it’s not contingent on the sale of the buyer’s home.
“I’ve seen situations where the seller didn’t have a kick-out clause, and then the buyer sat in escrow for six months,” she says. “Without the clause, the seller has no power —and there’s no way to get that buyer out.”
Typically, Pardee’s clauses give the first buyer 24, 48, or 72 hours to drop the contingency and proceed with the sale; if they can’t perform within that time, the seller can kick them out of escrow.
What happens if another offer comes in?
If you’ve accepted an offer that is contingent on a home sale and you have added a kick-out clause, your home should be listed with a status such as “Contingent With Kickout. This tells other buyers that the home is still available for showings and backup offers. (Note that MLS listing statuses vary across the country, and your agent will know which one to use for your home and update it for you in a timely manner).
If you receive a second offer, you have an obligation to notify the first buyer and to show proof of the offer with the names obscured. This correspondence usually goes through agents or attorneys, and it must be in writing — an email will suffice.
The notification will give the first buyer “the right of first refusal,” in which they have a certain timeframe to decide how they want to proceed. Rather than allowing a general 24, 48, or 72 hours, you might choose to state a more specific timeframe, such as “5:00 p.m. on the third business day after notification.” That can help to prevent any confusion if the second offer comes in on a weekend or holiday.
Once you have given proper notice of the second offer, the buyer has two main options:
- Cancel the contract and get back the earnest money deposit, at which point you are free to accept the other offer.
- Remove the contingency from their offer and proceed with the purchase of your home, providing proof that they have obtained financing.
Pardee points out that if subsequent offers come in, the seller can use those as leverage to put some heat on the buyer who is already in escrow.
“A non-contingent backup offer gives the seller a bit of power and control, particularly in scenarios where the first buyer is requesting a lot of expensive repairs,” she notes. If someone else is waiting in the wings with a non-contingent offer, you might have more leeway to push back on those requests.
And on the flip side, the first (contingent) contract can give you some leverage with the back-up buyers, perhaps coaxing them to offer a higher price than they normally would.
Cement and execute your kick-out clause with these 4 tips
- Paperwork is paramount. Always put the agreement in writing and make sure the contract is signed by both parties. Otherwise, the kick-out clause won’t be in effect and you won’t be able to enforce it.
- Timing is everything. Include specific timeframes to prevent any confusion or misunderstandings. For example, the clause might state that if another offer comes in, the first buyer would have three business days to complete the purchase of the property, regardless of whether their house had sold.
- It’s not instant. While a kick-out clause offers you some protection and power, it does carry some element of risk. If you choose to accept a backup offer and exercise the kick-out clause, it can take several days before the contract with the first buyer is canceled. In that case, the new buyer may not want to wait around, and could choose to find a different home that’s not under contract.
- Partner with an agent who has experience with kick-out clauses. An experienced agent will know when to recommend adding the clause in the first place, and can then help with crafting the terms and enforcing the actual “kick-out” if necessary.
The kick-out clause can be useful in a situation where you don’t want to pass up a contingent offer, but you also can’t afford to wait weeks or months for the buyer’s sale to go through. Just be sure to seek guidance from an experienced agent to ensure that your clause is clear, specific, and airtight.
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