Whether you're buying or selling, you may have heard the phrase kick-out clause tossed around. When does a kick-out clause get invoked and should you have one in your contract? Work with an experienced real estate agent to set up the best contract that has your interests at heart.
Updated May 10th, 2019
Have you received an offer on your house only to find out the buyer needs to sell their own home first? You may really want to enter into a contract while also wanting to also hold out for a better deal. That's where a kick-out clause comes in.
What is a kick-out clause?
When the seller receives an offer with a home sale contingency, while they may want to accept, they also usually don't want to take their house off the market for an indefinite amount of time. So, their real estate agent or lawyer can put a kick-out clause in the sales contract that allows the seller to continue to market the property while the buyer tries to sell their house.
The kick-out clause got its name because the seller can legally "kick out" the buyer if they receive another offer and the buyer is unable to remove the contingency within 72 hours. That makes the contingent contract null and void and allows the seller to sign a contract with the new buyer.
There are a few other names for the kick-out clause, such as a 72-hour clause, escape clause, release clause, hedge clause, or first right of refusal clause. If you hear of these clauses, know that the same terms that apply to the kick-out clause apply to those as well.
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Advantages of a Kick-Out Clause
There are many advantages to a kick-out clause—for buyers and sellers alike. Here are a few:
For sellers, having a kick-out clause means they have the best of both worlds. They have an original contract in place to sell their house and a way to cancel the contract if the buyer is unable to meet the terms and a new offer to purchase comes their way.
Buyers also have a pretty low risk. They're able to go house hunting without worrying about selling their house before buying a new one. Once they find a house, they are able to list their house knowing the house of their dreams is waiting for them.
If you're the seller, a huge advantage is the ability to continue marketing the house for a period of time until the buyer is able to buy the house, or you get a better offer. This allows you to be picky with your marketing and solid on your pricing. Sounds like a pretty great deal!
Room for Negotiation
If you're presented with a contingent contract and are able to negotiate a kick-out clause, you may be able to negotiate a few other things as well. If you expect your house to receive many offers, you could negotiate that the buyer has a certain number of days to try and sell their house before the contract is void. Because you are doing the buyer a favor, there is room for a bit of negotiation in the deal.
Drawbacks of a Kick-Out Clause
With advantages come disadvantages, and you need to be prepared for those as well. Here are a few to consider.
Losing the House
As a buyer, your largest disadvantage is the possibility that another offer will come in before you can sell your house. Although you'll have the option of waving your contingency, in many cases the buyer is not in a position to do that. A good way to combat that is to use a real estate agent to price your home in that sweet spot to sell quickly.
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Losing an Offer
If you are the seller and you receive another offer, you are required to give the original contract holder a period of time to decide if they want to waive their contingency or not. The buyer may say yes and agree to take on two mortgages and you as the seller will need to turn down the other offer. But if the buyer is unable to receive financing for two mortgages down the road, you are out not just one, but two offers.
A great way to combat that is to include language in the housing contract that states the buyer has a certain period of time to try and get financing before the seller can accept the other offer. This section in the contract can create an issue for the buyer, however, which leads us to the last disadvantage...
Losing the Sale
If the seller inserts language in the contract stating that if the buyer is unable to financially move forward with the purchase then the contract is void, the seller can use it to their advantage. The seller could get a better offer and claim that the buyer cannot financially afford to move forward with the sale, effectively slicing the buyer out of the sale.
Both the buyer and seller take on some risk when you employ the kick-out clause. You've just got to decide if you have the stomach for it.
How long do kick-out clauses last?
The amount of time that a kick-out clause lasts depends on the contract. The real estate agent or lawyer that sets up the contract can put in a period of time such as 60 or 90 days, or they can set it up to last until another the seller receives another offer.
Most real estate agents and lawyers advise their clients to put in a period of time that can then be renewed if both parties want to continue if time runs out before the contract is fulfilled.
Do kick-out clauses cost money?
Typically the only money paid when employing a kick-out clause is earnest money. The buyer will need to place earnest money down as they would with any house buying transaction. If the buyer employs the kick-out clause, the buyer will get all or some of their earnest money back, depending on what the contract says.
Do buyers have any options if the seller uses the kick-out clause?
It all depends on the contract. Buyers and sellers should both be very aware of the wording of the contract before they sign. If the seller kicks the buyer out of the deal in accordance with the original contract, the buyer really has no options with that sale. However, if the buyer believes the seller breached the contract, they should talk to a real estate lawyer to figure out their options.
If you're thinking about making or accepting a contingent offer, make sure you have your bases covered. As a seller, make sure the buyer is actively working on selling their house and not just taking you for a ride. As a buyer, make sure you understand all the terms that you must abide by according to the contract.
Both buyers and sellers can get a great deal by using a kick-out clause. If you think it would be helpful to you, talk to your real estate agent about it today.
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