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

In a buyer’s market, you may be able to sweeten a contingent offer on a home with a kick-out clause. This allows the seller to continue showing the house and soliciting bids. If they receive another bid without contingencies, you can either waive your contingencies to kick out the later bid or walk away from the sale without penalty. This can be a helpful strategy if you’re selling and buying a home 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.

If the seller accepts a kick-out offer with contingencies and later receives a second offer without contingencies, there are two possible outcomes: The original bidder can waive their contingency and buy the home, or the seller can ”kick out” the original bid and go with the contingency-free second offer.

A kick-out clause often 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 walk away 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 it and continue with the sale.

How does a kick-out clause work?

Here’s an example of how a kick-out clause can work:

1. A seller accepts an offer from a buyer who needs to sell their home first. They agree on a kick-out clause based on a home sale contingency in the purchase agreement.
2. A higher, non-contingent 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 back their earnest money, and the seller proceeds with the non-contingent offer.

Why would a seller accept a contingent offer with a kick-out?

Sellers might accept a contingent offer with a kick-out clause if they like some aspects of the buyer’s offer – say it offers more than the asking price or includes a large earnest money deposit. They may also expect the contingency to be resolved quickly. Another reason to accept an offer with a kick-out clause is if the seller’s in no rush to sell.

A kick-out clause protects the seller from a cooling housing market or having to re-list their home if the sale falls through. A kick-out clause also gives the seller some flexibility while giving the buyer time to sell their home.

Who should consider proposing a kick-out clause?

Those looking to buy 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. Kick-out clauses also can benefit buyers who have a house to sell or who may need extra time to get a mortgage.

Do kick-out clauses hurt buyers?

A kick-out clause typically doesn’t hurt a buyer, especially in a buyer’s market. 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.

In a seller’s market, the chances are slim that a seller will accept an offer with a home sale contingency – with or without a kick-out clause. The home sale contingency also is becoming less common overall, though it could come back if the housing market cools.

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.

It all depends on how much you love the house and how much time you have budgeted for buying a home. If you’re perfectly happy in your current home and bid only because you want to buy that specific home, you might be willing to make an offer with a kick-out clause as an outlier.

However, you’ll be hamstrung by submitting a backup offer if you’re considering more than one home simultaneously in a competitive market. Before you make a backup offer, make sure you understand the current bidder’s right to counter your offer.

If they have the standard 72 hours to remove the contingencies or walk away, you won’t be able to make other offers during that period. You’ll also need to offer earnest money to secure your offer.

Are there risks to including a kick-out clause?

Kick-out clauses carry some unique risks. Be sure to consider the potential downsides of a kick-out clause.

Risks for buyers

The biggest risk for a buyer is that your bid will be rejected, and you’ll be unable to purchase the home. You could get kicked out by a non-contingent offer or an offer with a better price. Therefore, including “right of first refusal” language – which would allow you to match any subsequent offer – can protect buyers from this risk.

Risks for sellers

One risk for sellers accepting an offer with a kick-out clause is that there’s always the risk 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 – especially if they must wait for an answer on their offer during the 72 hours the initial buyer must decide how they wish to proceed.

For sellers to avoid this risk, it’s wise for them to consider requesting that the first buyer has a 24-hour deadline. This can help the buyers who are making the second offer feel more comfortable. Remember, a seller can choose not to accept an offer with contingencies, or they can negotiate the contingencies before an offer is accepted.

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

A kick-out clause can help a potential buyer put in a contingent offer on a new home while giving the buyer time to resolve their contingencies. Homeowners trying to sell their homes in a buyer’s market may be more willing to accept a weak contingent offer if they remain free to accept a better one.

Are you getting ready to make an offer? Apply online now and strengthen your contingent offer with a Verified Approval Letter from Rocket Mortgage®! You can also give us a call at (833) 326-6018.