During the process of buying or selling a home, you might encounter a kick-out clause, but what is it? Maximum Real Estate Exposure has an excellent explanation but we are also going to run through the basics here.
Home buying or selling can already seem complex, so do you really need another clause to deal with? Kick-out clauses can offer many advantages to sellers, but could also help buyers.
We’ll take a look at this type of clause and how it can affect the home sale.
What is a Kick Out Clause?
When you are selling your home, your buyer might have contingencies. One of these could be a home sale contingency. This will mean that they can wait to find a buyer for their home before closing on yours.
This could be a big problem for you, meaning you wait around potentially for months to close. There will be a date in the purchase agreement that allows the buyer a certain amount of time to find their own buyer.
When that date is reached your buyer can exit the purchase with their earnest money returned. A seller would not be able to keep the earnest money in this circumstance.
If this happens, you will need to relist your home, starting the process again. Contingencies normally benefit the buyer, but a kick-out clause gives some power back to the seller.
A kick-out clause allows the seller to continue to market the home while any contingencies are completed. The home will remain on all the popular home buying websites.
When a contingent offer has been accepted, the seller could receive another offer, but without contingencies. The kick-out clause allows the seller to end the contract with their first buyer and go with another buyer.
When the kick-out clause is triggered, the buyer does get some time to try to continue with their purchase.
The buyer could get 24 to 72 hours to remove their contingency and continue with their purchase.
If they cannot do that, the seller is free to continue with the second buyer.
The Advantages to Sellers of Kick-Out Clauses
Stipulating a kick-out clause gives sellers more options, leaving the door open for a better offer. The seller might find that a better offer comes along without contingencies and possibly even offering more.
With a higher offer, the first buyer will need to match it and complete the contingencies that are holding up the sale.
The threat of the kick-out clause could also motivate the first buyer to try harder to meet the contingencies. If they really want the house, they know that another buyer might snatch it from them.
With this clause, the home will be listed in the MLS as contingent with kick out,’ something that could motivate other offers. It will show the home is in demand and could make a higher offer from someone else more likely.
Is a Kick-Out Clause Bad for Buyers?
While it is easy to assume the kick-out is bad for buyers, there is an upside. This clause does make it more likely that the seller will accept contingencies since it offers some protection.
Without it, buyers are less likely to accept contingent offers.
A buyer will also be able to negotiate price and terms before putting their own home up for sale. Knowing the purchase price on the back end can make decisions easier when selling a home.
Can Kick-Out Clauses be Bad for Sellers?
The clause does offer extra protection for the seller, but some things can still go wrong:
If you trigger the clause and your buyer decides to continue with their purchase without contingencies, they could have financing problems. The buyer might not be able to have two mortgages at the same time, leading them to fail to close on the new home.
While the seller will get to keep the buyer’s earnest money, they will still need to relist their home.
Avoiding this situation is fairly straightforward, however. If the buyer waives their financing contingency, ask for proof. This could be a preapproval letter that shows they have the income to cover both mortgages.
Proof of funds is essential whether a buyer is paying cash or not.
There can be issues if the clause is triggered on the weekend or holiday, not giving the buyer much time to act. To deal with this, instead of a certain number of hours, business days can be used.
This could put the second buyer off, perhaps allowing them to find another home in the time they are waiting.
Contractual Wording is Important
The wording in a clause like this is important. To ensure that you make the most out of this clause, you need to be working with a real estate agent that has the experience to ensure the correct contractual language is used.
While a kick-out clause does increase the complexity of a purchase contract, when you are selling your home it does offer important advantages.
If you accept offers with contingencies it means you avoid handing over all the power to the seller and can save you a lot of stress when you're selling your home.
In some circumstances a kick-out clause may be beneficial to both buyers and sellers. Getting the correct acceptable wording for the clause is paramount for both parties.
If you are not sure about any of the language in a kick-out clause addendum, make sure you get legal advice from a real estate attorney.