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

Suppose you’re driving home from work one day and you spot a “For Sale” sign in front of your dream home. You’d love to buy it, if only you could sell your current home.

In a buyer’s market, a home buyer may be able to sweeten their offer by suggesting that both parties agree to having a kick-out clause in the real estate purchase agreement. Simply put, the home buyer would agree to let the seller continue showing their home while the buyer puts their efforts into getting contingencies resolved ASAP.

Let’s take a closer look at what a kick-out clause is, how it works when you include one in a purchase agreement, and who might benefit from one.

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 a 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 a non-contingent second offer. The contingency buyer then has the option of removing the contingency from the contract or walking away from the home sale.

How does a kick-out clause work?

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, you may experience delays. But that’s where a kick-out clause comes in. Before we delve into how a kick-out clause works, though, let’s examine what a contingency means in real estate.

A contingency is when a buyer makes an offer on a house but has a few parameters that must be met first. Sellers can also have contingencies. One contingency in a real estate transaction can be a kick-out clause.

Sellers who receive a non-contingent offer while in a contingent contract featuring a kick-out clause will notify the first prospective buyer of their other offer. The original buyer then must decide whether to proceed with the sale without the contingency or walk away from the deal. The initial prospective buyer has a certain amount of time (typically 72 hours) to make a decision. If they choose to drop the contingency and move forward with plans to purchase, the seller must then decide which offer to accept.

The contingency in question is usually the home sale contingency, which allows buyers to walk away from a home purchase if they can’t sell their own home within a specified period of time. If the original buyer walks away in this instance, the buyer’s earnest money is returned and the seller enters into a new, non-contingency contract with the second buyer.

The kick-out clause describes the procedure the buyer and seller should follow if a contingent-free offer comes along.

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

Sellers might like other aspects of the buyer’s 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 also gives the seller some flexibility and helps the buyer get the time they need to sell their home.

Who should consider proposing a kick-out clause?

If you’re thinking of buying a house in a slow real estate market – when buyers have more power than sellers – a kick-out clause can help buy you some time in deciding whether to pursue a specific property. The kick-out clause can also provide contractual protection with a win-win situation that the seller is likely to accept.

Let’s check out two situations when you may consider including a kick-out clause in the real estate purchase agreement. 

A home buyer with a house to sell

The home sale contingency says the buyer will complete the home purchase only if they can sell their current home in the meantime. This particular contingency has all but disappeared in the seller’s market we’ve experienced the past few years, but it may return if the housing market changes significantly in the future.

A home buyer who needs financing

Similarly, if you’ve needed financing – a home loan – to purchase your home in the past few years, you might’ve been keenly aware that you were at a competitive disadvantage if you included a mortgage contingency in your offer. In a buyer’s market, these contingencies will once again probably become a routine inclusion in real estate purchase agreements.

Do kick-out clauses hurt buyers?

A kick-out clause doesn’t hurt a home 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.

In seller’s markets, on the other hand, the chances are slim of a seller accepting an offer that has a home sale contingency – with or without a kick-out clause. The home sale contingency is also becoming less commonly sought by buyers. That could change if the housing market cools and equilibrium is restored in negotiations between buyers and sellers.

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

If you encounter this type of real estate listing, it means you can see 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 on a home. 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 house hunting. For example, if you’re perfectly happy in your housing situation and only bid because you just love that home, you might be willing to make an offer if it’s your only chance.

But you’ll be hamstrung if you submit a backup offer while considering several homes simultaneously in a competitive real estate market. Before you make a backup offer, make sure you understand the first offeror’s rights 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 have to offer up earnest money to bind your offer.

Are there risks to including a kick-out clause?

Certain risks come with any real estate transaction, but kick-out clauses carry some unique risks. Below, we’ll explore some of the potential downsides of a kick-out clause for buyers and sellers.

Risks for buyers

The apparent danger is that the buyer won’t purchase the house because they get kicked out. They could get kicked out by either 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.

Risks for sellers

Additionally, there’s always the risk that the buyer’s offer could still fall through on the financing contingency for sellers. If this happens, the seller has lost out on both offers, leaving the seller to re-list their property altogether. Sellers also risk the second buyers not wanting to 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 people 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 risk-free time to resolve their contingencies. Homeowners trying to sell their home in a buyer’s market may be more willing to accept a weak contingent offer if they remain free to seek a better offer. If you’re not sure whether you should propose a kick-out clause in a purchase contract, consult an experienced real estate agent.

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.