Have you heard the term “kick-out clause” and wondered what it meant?
In many home sales, time is essential. The seller might need their buyer to close on the home in a certain period. The problem is that many things often get in the way of things going the way you want.
Often contingencies can cause problems for the buyer that delay the sale. Contingencies are clauses that allow the buyer enough time to prepare to purchase the home.
While most contingencies benefit the buyer, a kick-out clause in real estate helps the seller.
Let’s look at everything you need to know about kick-out clauses.
Kick Out Clause Definition
A kick-out clause in a real estate contract allows the seller to reject an accepted offer in favor of a new one from another buyer.
In some states a kick-out clause is referred to as a bump out clause.
Kick-out clauses are generally beneficial to both parties and are used in a minimal number of situations.
The prospective buyers want to sell their current house to purchase a new one.
The seller accepts the buyer’s situation and allows them to have a kick-out provision when making an offer. But the seller also doesn’t want to wait for an open-ended amount of time for a buyer to sell their current home.
The compromise is the kick-out clause allows the seller to “kick out” the first buyer should another buyer come forward. It is also referred to as an active kick-out clause.
If a seller gets a backup offer with better terms and wants to accept, they need to notify the original buyer with the accepted contract.
The original buyer then has to decide if they want to move forward with the agreement without their home sale contingency. The period of time in a kick-out clause for the buyer to make a decision can vary. The typical time period is 24-72 hours.
When the buyer decides to walk away, they will get their earnest money deposit back. The seller will be free to move forward with the second buyer. A kick-out clause is similar to a right of first refusal.
The kick-out language is a type of contingency in a real estate transaction that is more common in a buyer’s market vs. a seller’s market. In competitive markets, they are rarely found because sellers often don’t need to accept a contingent contract.
What is a Kick Out Clause in Real Estate Contracts?
With a kick-out clause written into the purchase contract, the seller’s home can continue to be marketed to other potential buyers, even after accepting an offer.
The kick-out clause allows sellers to accept an offer from a buyer even with complex contingencies. The home sale contingency allows the buyer to find someone to purchase their own property before they can proceed. A contingency like this can potentially delay the sale of the home.
A kick-out clause allows the seller to find a new buyer without contingencies, with an earlier closing date. When this happens, the home will be listed as “active with kick out” in the multiple listing service (MLS).
When the seller finds a more favorable offer, either because they have no contingencies or perhaps they are willing to bid higher, the kick-out contingency can be triggered.
It means a second offer replaces the first buyer who had the contingency with a kick-out clause. While this isn’t great for the buyer, they do have some options if this happens.
How Do Kick-Out Clauses Work in Practice?
When the seller accepts an offer contingent with kick out, and then they receive a non-contingent offer from someone else, they need to notify the first buyer. This will give the first buyer the option of continuing with the purchase without their contingency.
The buyer will only be given a limited time to meet this requirement or walk away from the purchase. They could have just 24-72 hours to complete the contingency requirements, drop the contingency, or decide to begin looking for another home to buy.
Listings that are active kick out in real estate often happen because the buyer needs to use a home sale contingency. While they have found a home they want to buy, they don’t yet have a buyer for their own property.
The home sale contingency allows the buyer to exit the purchase contract if they cannot find a buyer for their own home. When this happens, they will get their earnest money deposit back.
What Happens When The Buyer Removes a Kick Out Clause?
When a Real Estate agent receives a new offer in a purchase agreement from a second buyer, the first buyer can choose to remove their home sale contingency. If that happens, the seller must proceed with the first buyer.
When accepting a kick-out clause, it is wise for sellers to ensure the buyer is qualified to purchase without selling their own house. The financing contingency should not be dependent on the buyer closing on their existing home.
If the buyer cannot show proof they can proceed without selling, then the seller would be able to terminate.
Why Do Sellers Accept Contingent Offers?
While contingencies don’t generally benefit the seller, there are many reasons why they might accept this type of offer. Perhaps the buyer offered more than the asking price, they aren’t in a hurry to sell their home, or a large earnest money deposit is provided.
In the case of a home sales contingency, they might believe or have been told that the buyer’s home will sell quickly. In markets with few buyers, sellers will be more willing to make concessions and accept contingencies to sell their homes.
Including a kick-out clause in the purchase contract protects the seller and gives them more options. It means they’re not stuck waiting on a buyer if the housing market becomes more difficult for sellers.
It also means that there is less risk of having to relist their home when a sale falls through.
Are Kick-Out Clauses Bad for Buyers?
While buyers might not like the prospect of a kick-out clause being triggered, it can benefit them in some ways. If they want to include contingencies in their offer, the seller will be more likely to agree to them if a kick-out clause is included.
Home sale contingencies are less common now due to more sellers’ markets. It means that the buyer isn’t able to ask for a contingency like this when there are plenty of other competing buyers around.
Kick out language in a real estate contract becomes a compromise for a buyer when a seller won't accept a home sale clause.Click To TweetIs Any Risk of Having a Kick Out Clause in Real Estate Contracts?
With any home purchase transaction, there are risks of the deal falling apart. However, a kick-out clause does add to the potential for something to go wrong.
There is the risk to the buyer that they will be pushed out of the deal if someone else comes along with a better offer. Another buyer who does not require contingencies, or someone prepared to offer more money, could mean the first buyer is kicked out. The option to match the better offer should be included in the contract to reduce this risk.
If a seller chooses to take a better offer, there is still a chance that this new buyer’s offer will fall through. If that happens, the seller is left without a buyer and has to return their home to the market.
Since the seller will give their first buyer the chance to drop the contingency, they could lose the second buyer at this time. The first buyer could have 72 hours to decide what they will do, and the second buyer might not want to wait around that long and move on.
To avoid this, the seller can reduce the time the first buyer has to decide. If they give the first buyer 24 hours instead, there will be less chance that they lose the second buyer.
Pros and Cons For Kick Out Clauses
With most arrangements in real estate, there are pros and cons for buyers and sellers. A kick-out clause is no different. Let’s recap:
Pros For a Home Buyer
- A kick-out clause gives the buyer the potential opportunity to sell their existing home. A simultaneous buy and sell can be challenging.
- The buyer knows the price they’re able to purchase a particular home.
Pros For a Home Seller
- A seller has a buyer on the hook to purchase their property.
- If a better offer comes along, the seller can terminate the first contract and go with the 2nd offer.
Cons For a Home Buyer
- The buyer could lose out to a higher bid at any time.
- A seller might not be willing to give much time for a buyer to sell their home in a strong seller’s market.
Cons For a Home Seller
- A kick-out clause could deter some buyers from making an offer.
- The kick-out time frame could impede a second buyer from moving forward under a tight time frame.
- A seller could get a cash offer or higher offer that they can’t exercise if the current buyer moves forward without the kick out.
Kick-Out Clauses Can Protect Sellers and Help Buyers
Kick-out clauses do offer more to the seller than the buyer. However, they can allow the buyer to include a contingency that the seller wouldn’t otherwise accept.
The advantage of a kick-out clause for the seller allows them the flexibility to keep their home listing active while their buyer tries to complete their contingencies. It avoids the problem of having to wait around for a buyer when there doesn’t seem much chance of them getting to the closing.
You should now have a much better understanding of what a kick-out clause means and how it works.
About the author: The above Real Estate information on what is a kick out clause was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for 35+ years.
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