What Is A Kick-Out Clause And Why Do Sellers Like Them?
In many cases, it’s a good idea to implement a “kick-out clause” when you’re selling your home because a kick-out clause allows you to continue marketing your house even though you have entered into a sales contract.
Here’s what you need to know about kick-out clauses in real estate.
What Is A Kick-Out Clause?
A kick-out clause is a type of contingency in the purchase agreement. A contingency is a condition that must be met in order to go through with a sale. A kick-out clause impacts buyers and sellers differently.
How a kick-out clause affects sellers: A kick-out clause lets sellers continue to market their home in the event that they receive an offer with contingencies. In other words, a kick-out clause in the sales contract allows the seller to “kick out” a buyer with contingencies if a better offer comes around.
An example of a common contingency is that the buyer must sell their current home before they buy another. If the seller gets another offer without contingencies, the buyer must either remove the contingencies from the purchase agreement and proceed to closing or walk away from the sale.
How a kick-out clause affects buyers: When you make a contingent offer within a kick-out clause, you must sell your home within the specified amount of time or risk losing the home to another buyer.
Why Include A Kick-Out Clause In A Sales Contract?
Sellers want kick-out clauses so that they can continue to market, show and ultimately accept offers without the contingencies they agreed to with the original buyer. Buyers might prefer a kick-out clause to a straight rejection of their offer.
The original buyer will have a certain period of time to remove the contingency. If the first buyer sells their original home within the contingency timeframe, the kick-out clause disappears and the seller can no longer market the house to other buyers.
Sellers may be able to give the buyer a certain amount of time to drop the contingency and proceed with the sale. If they can’t make it happen within that amount of time, the seller can kick them out of escrow.
How Does A Kick-Out Clause Work?
When sellers enter into a purchase agreement with contingencies and a kick-out clause with buyers, they may continue marketing their property. Here are a few more details on how a kick-out clause actually works.
- The buyer asks the seller for a real estate contract called the “home sale contingency period.” The period depends on market conditions and can range from 30 to 90 days. During this time, the seller can still continue to show the house.
- The seller must notify the first buyer if an offer comes along from a second buyer – this is usually done through lawyers. Most purchase agreements allow buyers 72 hours to either remove the contingency or walk away from the sale with their earnest money. These agreements are usually structured to allow the original buyer to match a subsequent offer.
- Once the buyer knows about the second offer, the buyer must decide whether to purchase the seller’s house without selling their own house or cancel the contract.
- If the first buyer decides to continue with the purchase, closing usually occurs within 45 days of the buyer’s decision to proceed.
- If the first buyer decides not to proceed because the first buyer has not sold their original house, the contract between the seller and the first buyer is canceled. The seller is then free to enter into a contract with the second buyer. The first buyer’s earnest deposit money is typically returned.
Here’s an example: Let’s say a buyer puts down an offer for $160,000 on a home and another buyer comes along a week later and offers $190,000 instead. If a 72-hour clause has been written into the contract, the original buyer now has 72 hours to make a better offer than $190,000.
Another example: Let’s say that a buyer must sell their current home before they buy another one. They put an offer on a particular home contingent on the sale of their current home. However, another buyer comes along who can buy a home without waiting for their other house to sell. That buyer puts an offer on the house as well. The first buyer has 72 hours to either walk away from the sale or come up with the money to pay for the home.
What Happens If The Buyers Agree To Remove The Contingency?
The buyers may agree to remove the contingency, and in that case, the sellers are bound to the original offer.
However, sellers might want to include language in the kick-out clause to state that buyers can remove the contingency but must prove they can secure financing for the loan to purchase the home. If the purchasers cannot prove they can move forward financially, then the seller can walk away from the contract.
What Happens If The Buyers Decide To Walk Away?
If the buyers remove the kick-out-period after 72 hours, they can still walk away from the contract based on another contingency that has not been met. The buyer still can find an excuse to back out of the contract, based on another contingency in the contract. If the buyers decide to walk away from the home, the sellers are free to enter into a new contract with the party who made the second offer.
Buyers should be sure to include language about the return of all earnest money paid at the time the sales contract is signed.
For example, here’s how it might read: “Both parties agree that the sellers' property shall remain on the market during the contingency period. If the buyer does not remove the above contingency and provide evidence to the seller of their ability to perform under the terms within [number of hours] after receipt of written notice that seller has accepted a secondary contract, the buyer’s earnest money shall be promptly returned in full.”
Can Kick-Out Clauses Cause Any Unintended Consequences?
Kick-out clauses can cause unintended consequences. Here are a few:
- Houses actively marketed with a kick-out clause can make the home unattractive to buyers who wish to move quickly because they know the original buyer will have a chance to match their offer.
- The buyer may get kicked out and will not purchase the house.
- The second buyer’s offer could fall through. If this were to happen, the seller would have lost out on both offers and be forced to re-list their property.
Kick-Out Clauses Keep Sellers In The Market
It’s important for sellers to implement a “kick-out clause” so they can continue to keep their house on the market even though they’ve entered into a sales contract, which typically lasts from 30 to 90 days.
A kick-out clause is a type of contingency, or a condition that must be met in order to go through with a sale, in the purchase agreement.
Sellers may be able to give the buyer a certain amount of time – usually 72 hours – to drop the contingency and proceed with the sale. If the buyer can’t make it happen within that amount of time, the seller can kick them out of escrow.
Sellers should carefully devise a contract with a kick-out clause so that the potential buyer can remove the contingency. It must also verify that they secure financing for the loan to purchase the home. If the purchasers cannot show financial readiness to move forward, then the seller can walk away from the contract.
Buyers can also walk away from the contract as well if they can’t remove a contingency.
Ultimately, kick-out clauses intends to help both sellers and buyers. Learn more about the process of buying a home.