What Is A Kick-Out Clause And Should You Include One?
Victoria Araj5-minute read
July 07, 2023
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 include a kick-out clause in the purchase agreement. Simply put, the home buyer would agree to let the seller continue showing their home while they put their efforts into getting contingencies resolved ASAP.
Let’s take a look at what a kick-out clause is, how it works when you include one in a purchase agreement and who might benefit from proposing 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 either removing the contingency from the contract or walking away.
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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, there can be delays. 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.
Sellers who receive a non-contingent offer while in the contingent contract will notify the first buyers. The first buyer 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.
The clause should describe the procedure the buyer and seller will follow should a contingent-free offer come 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 gives the seller some protection and flexibility and helps the buyer get the time they need to sell their home.
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Who Should Consider Proposing A Kick-Out Clause?
If you’re thinking of buying a house in a slow real estate market – where buyers have more power than sellers – a kick-out clause will buy you some time and contractual protection with a win-win situation that the seller is likely to accept.
A Home Buyer With A House To Sell
The home sale contingency says that the buyer will complete the home purchase only if they can sell their current home in the meantime. These types of contingencies have all but disappeared in the seller’s market we’ve experienced in the past few years, but they may return should the housing market change significantly in the future.
A Home Buyer Who Needs Financing
Similarly, if you needed financing – a home loan – to purchase your home in the past few years, you might have 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 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 seller’s 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. 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 that you can see the house, but until the contingencies in the first offer are resolved or the contract is canceled, you’ll only be able to make a back-up offer on a home. That’s fine for some buyers, but 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 back-up offer while considering several homes simultaneously in a competitive market. Before you do, 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 and you’ll have to offer up earnest money to bind your offer.
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 buyer’s 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.
The Bottom Line: Kick-Out Clauses Protect Sellers And Help Buyers
Kick-out clauses can help buyers put in a contingent offer on a home while giving themselves risk-free 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 seek a better offer.
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.
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