What Is A Kick-Out Clause And Should You Include One?
Ashley Chorpenning3-minute read
October 16, 2020
Timing is everything, especially when purchasing a home. It's a challenging situation when you're selling one home and buying another, and even when the timing is almost perfect, there are contingencies. A contingency is when a buyer makes an offer on a house but has a few parameters that must be met first. One of these contingencies is called a kick-out clause.
What Is A Kick-Out Clause?
A kick-out clause allows home sellers to continue showing and accepting offers even after accepting a contingent offer. A kick-out clause is a provision in a home's sales contract that allows sellers to accept an offer with a contingency, generally the home sale contingency, while still showing their home in hopes of receiving a non-contingent offer. In general, if the seller gets a better offer, the clause allows the seller to "kick-out" the contingency buyer and proceed with the second offer.
How Does A Kick-Out Clause Work?
Sellers who receive a non-contingent offer while in the contingent contract will notify the first buyers. The first buyers must decide whether to proceed with the sale without the contingency or walk away from the purchase. The buyers typically have a set period of 72 hours. Therefore, the sellers must make a quick decision about which offer they will take.
The contingency in question is usually the home sale contingency, allowing buyers to walk away from home purchases if they can’t sell their own home within a specified period. If the first buyer walks away, the buyer’s earnest money is returned, and the seller enters into a new, non-contingency contract with the second buyer.
Why Would A Seller Accept A Contingent Offer With Kick-Out?
Sellers might like other aspects of the buyers' offer, like an offer that's above the asking price, or an extra-large earnest money deposit. Sellers might take a contingent offer from a buyer whose home is likely to sell quickly, or they may be OK with a contingent offer if they're not in a rush to sell their home.
A kick-out clause protects the seller from the risks of a cooling housing market or having to re-list the home if the sale should fall through. A kick-out clause gives the seller some protection and flexibility and helps the buyer get the time they need to sell their home.
Do Kick-Out Clauses Hurt Buyers?
A kick-out clause does not hurt buyers. The kick-out clause might help buyers get their contingencies accepted because the seller does not take the risk of missing out on a better deal. However, in sellers’ markets, the chances of a seller accepting an offer with a home sale contingency with or without a kick-out clause are slim, and the home sale contingency is becoming less commonly sought by buyers.
Are There Risks To Including Kick-Out Clauses?
There are always risks to any transaction, but kick-out clauses carry some unique risks. The apparent danger is that the buyer will not purchase the house because they get kicked out. They could get kicked out either by a non-contingent offer or a better price. Therefore, including the “right of first refusal” language, which would allow buyers to match the better price, can protect buyers from this risk.
Additionally, there is always the risk that the buyers’ offer could still fall through on the financing contingency for sellers. If this were to happen, the seller would have lost out on both offers, leaving them to re-list their property. Sellers also risk that the second buyers will not want to wait for an answer on their offer during the 72 hours that the first buyers must decide how they wish to proceed.
For sellers to avoid this risk, it is wise to consider asking for a 24-hour deadline for first buyers. This deadline will help the people making the second offer feel more comfortable. Remember, a seller can choose not to accept an offer with contingencies or can negotiate the contingencies before an offer is accepted.
Summary: Kick-Out Clauses Protect Sellers And Help Buyers
Kick-out clauses can help buyers put in an offer on a home that they need a few days to purchase. A kick-out clause often comes as a part of a home sale contingency, which means that the buyer is willing to buy the home, permitting selling their existing property. However, if a seller gets a better offer, they can “kick out” the first buyer and still sell their home. This protects sellers from being stuck with an offer that could fall through.
If you’re interested in learning more about the home buying process, be sure to check out our Learning Center. There, you will find resources on buying and selling a home, as well as how to make the most of your existing property.
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