Original Article By: Michael Yessis of listwithclever.com
A kick-out clause in a home-purchase contract allows a seller to reject an accepted offer in favor of a new one from another buyer.
While it may sound harsh, a kick-out clause generally benefits both parties and overwhelmingly applies to one situation: A buyer wants to sell their current house before finalizing the purchase of a new house.
The seller understands and accepts the buyer’s desire. The seller also doesn’t want to wait indefinitely for the buyer to sell their current house.
✅ The solution: The seller reserves the right to “kick out” the first buyer should a second buyer materialize.
The kick-out clause is a common way to address this situation.
“Every contract we negotiate where a seller has to sell a property to purchase a property will have a kick-out clause or a contingency offer,” says Ramona Williams, an agent with Keller Williams Partners in Colorado Springs, Colorado.
Kick-out clause: a little more context
A kick-out clause is a kind of contingency — a condition in a home-purchase contract that must be met before the contract becomes legally binding.
While it’s typical for a buyer who needs to sell their house to ask for a home-purchase contingency, which includes a kick-out clause, in the big picture it’s not a common contingency.
Only 6% percent of home-contract contingencies focused on the buyer selling their current home, according to the May 2020 Realtors Confidence Index Survey.
📖 A few details about contingencies
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Kick-out clause: The framework
The kick-out clause allows sellers to continue to market their home to other potential buyers while the initial buyer attempts to sell their house.
The clause remains in the background of the transaction until one of two events happen:
The buyer sells their home
Then what? The kick-out clause becomes moot, and the buyer moves forward with the purchase of the seller’s home.
Another potential buyer of the seller’s home submits an offer
Then what? When the second situation occurs — and the new offer doesn’t come with a contingency that the buyer has to sell their house — the seller can invoke the kick-out clause, should they want to accept the offer.
Kick-out clause: How it plays out
The seller alerts the buyer in writing.
The document states the limited amount of time the original buyer has to make a decision. It’s usually a 72-hour deadline unless the parties have negotiated for more or less time at the outset of the offer.
Before the deadline, one of two things happens:
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Option 1
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Option 2
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The initial buyer removes the home-purchase contingency and moves forward with the transaction.
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The buyer resolves to be “kicked out” and gives way to the new buyer.
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In the latter case, the buyer will usually get back their earnest money — the good-faith deposit that’s typically paid during a home purchase.
Kick-out clause: Pros and cons for buyers
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✅ Pros for buyers
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❌ Cons for buyers
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A kick-out clause lowers a buyer’s risk. It ensures the buyer can sell their current house and not get stuck with two houses and two mortgages.
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Some sellers may not want to accept a contingency with a kick-out clause. This is particularly true in a hot market.
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A buyer could lose the house to a better offer during the time they’re waiting to sell their current house.
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Kick-out clause: Pros and cons for sellers
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✅ Pros for sellers
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❌ Cons for sellers
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A kick-out clause lowers a seller’s risk. Sellers can have a home-purchase contract in place to sell their house and also an option to cancel the contract should a better offer come their way.
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The window of time the buyer gets to make a decision once the kick-out clause is invoked can impede a second offer.
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Sellers can continue to market their house, seeking a better offer.
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Just having an offer to compete against could influence secondary offers.
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Sellers maintain a strong negotiating position. The buyer presumably has fallen in love with the seller’s house, which could give the seller leverage to negotiate other terms of the home-purchase contract favorably.
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The buyer could run into financing issues. Potentially taking on two mortgages, for instance, can pose difficulties.
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What’s the impact of a kick-out clause in a hot market?
A kick-out clause can make a buyer’s offer less attractive in a market that’s favorable to sellers.
“In a seller’s market, we are seeing tons of competing offers on every home,” says Colorado Springs, Colorado-based agent Ramona Williams. “Most of the time the kick-out clause puts them in last place as a buyer to purchase a home.”
Williams notes some possible moves a buyer who needs to sell their home can make to avoid a kick-out clause:
- A buyer can move to a temporary house after the sale of their home, Williams says. Once their home is sold, they won’t have to deal with a kick-out clause and can start looking for a new home.
- A buyer can use a company that can underwrite their purchase of a new house, then help sell their old house for a fee.
Williams also points out that a buyer can potentially borrow from their 401(k) to make the down payment on a new home, eliminating the need to sell their house first to free up financing. Once the buyer sells and closes on their own house, they can pay back their 401(k).
The 401(k) option comes with some risks. A good agent can talk you through all your financing options and help determine what’s best for you and your situation.
