What is a kick-out clause and should you include one?

If you’re buying and selling a house at the same time, striking the right balance of timing can get tricky. A kick-out clause lets the seller continue marketing the home and gives the first buyer a set window to remove contingencies if a better offer comes in.

This guide explores the intricacies of a kick-out clause and why they might come in handy, especially if you’re buying and selling a house at the same time.

What is a kick-out clause?

A kick-out clause allows sellers to continue showing and soliciting offers on their house after accepting an offer with contingencies. Contingencies are conditions that must be met for the sale to go through.

Oftentimes, a kick-out clause is used when the buyer’s offer is contingent on them selling their current home before buying another. If a second offer comes in and the original bidder has been unable to sell their home, they can kick out the first offer from the deal without penalty. But if they sell their home or expect to sell it in time to meet the contingency, they can waive the contingency and proceed with the sale.

How does a kick-out clause work?

Although the state real estate laws can affect how the mechanics of a kick-out clause might work in a real estate transaction, the general purpose of a kick-out clause transcends state lines.

Here’s how kick-out clauses generally work:

1.  A seller accepts an offer from a buyer who needs to sell their home first. They agree to a kick-out clause based on a home-sale contingency in the purchase agreement.
2. A higher, noncontingent offer comes in from a second buyer.
3. The seller initiates the clause.
4. The first buyer now has a predetermined period – usually 72 hours – to waive the contingency and buy the house or walk away from the deal.
5. If the buyer cancels the deal, they get their earnest money back, and the seller proceeds with the noncontingent offer.

Since details can vary, it's critical to read the fine print of your purchase agreement to confirm your kick-out clause terms.

The influence of kick-out clauses

A kick-out provision in a home purchase offer affects both the buyer and seller in different ways.

Generally, kick-out clauses are more prevalent in buyer’s markets than seller’s markets. That’s because sellers facing a buyer’s market often see limited interest in their property, making an offer with a kick-out clause more attractive than it might be in a seller’s market.

Explore the advantages and disadvantages of kick-out clauses for both buyers and sellers below.

On sellers

Sellers might accept a contingent offer with a kick-out clause if they like some aspects of the buyer’s offer, such as a sale price above the asking price or a large earnest money deposit. They may also expect the contingency to be resolved quickly. Other reasons to accept an offer with a kick-out clause include the seller being in no rush to sell or the seller having trouble finding a buyer.

Additionally, a kick-out clause can protect the seller from a cooling housing market or having to re-list their home if the sale falls through.

On buyers

From the buyer’s point of view, a kick-out clause might come in handy for buyers who have a house to sell or who may need extra time to get a mortgage. Additionally, making an offer with a kick-out clause might give you the chance to decide if you truly want to move forward with a property without the pressure of potentially competitive offers.

In a buyer’s market, a kick-out clause generally won’t hurt a buyer. In fact, a kick-out clause might help a buyer get their contingencies accepted because the seller won’t risk missing out on a better deal. But in a seller’s market, it’s unlikely a seller would consider a kick-out clause.

Should I make an offer on an active kick-out listing?

If you find a home listed with an active kick-out clause, it means you can tour the house, but until the contingencies in the first offer are resolved or the real estate contract is canceled, you’ll only be able to make a backup offer. That’s fine for some buyers, but it can create problems for others.

Here’s when making an offer on an active kick-out listing might make sense:

• You love the house: If you want to buy that specific home because it checks all the boxes on your list, by all means, consider making an offer.
• You have time to keep searching: If you have plenty of time to find another housing situation, the extra time might not be an issue, even if your offer isn’t accepted.
• You have enough earnest money: If you have enough cash on hand to cover an earnest money deposit, making an offer can make sense.

Are there risks to including a kick-out clause?

• Both buyers and sellers take on some risk when using a kick-out clause. Here’s what to keep in mind:
• For buyers. A kick-out clause protects buyers from missing out on a home when they need more time to obtain financing or sell their current home. If the seller accepts the offer with this contract clause, it can give buyers more wiggle room in the home purchase timeline.
• For sellers. One risk for sellers accepting an offer with a kick-out clause is that the buyer's offer could still fall through. Another possible risk is that other prospective buyers might not want to make a backup offer if there is an existing accepted offer with a kick-out clause.

FAQ

If you have additional questions about kick-out clauses, the following answers may help.

Who should consider proposing a kick-out clause?

Buyers looking to purchase a home might consider a kick-out clause during a buyer’s market. It can give you some time to decide if you really want to buy a specific property. It’s an especially helpful tool for buyers who need to sell their home or require extra time to obtain financing.

What is the 72-hour kick-out clause?

A 72-hour kick-out clause allows sellers to accept an offer but continue to show the home and receive other offers. If the seller receives a better offer, the first buyer has 72 hours to remove their contingencies and proceed with the sale, or lose the house.

What happens if a backup offer is made on a property with a kick-out clause?

If a backup offer is made on a property with a kick-out clause, the seller must contact the original buyer. The original buyer must decide whether to remove the contingencies and proceed with the purchase or walk away from the home.

Is a kick-out clause legally binding?

Yes, like all clauses within a real estate contract, a kick-out clause is legally binding.

What happens to earnest money if a buyer is kicked out?

The original buyer will get their earnest money back if the kick-out clause is initiated.

The bottom line: A kick-out clause protects sellers and helps buyers

A kick-out clause can help a potential buyer make a contingent offer on a new home while giving them time to resolve their contingencies. For sellers navigating a buyer’s market, the weak contingent offer might be welcomed if they remain free to accept a better one.

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