A year ago, my family decided to take the home buying plunge again. It would be our third purchase, and our biggest yet. We didn’t think twice about including a contingency to sell our current home in the offer. No one wants two mortgages, we’d done that before and I wasn’t prepared to go without my morning coffee for months on end. But, the seller countered and only agreed to take our offer if we waived the contingency entirely. Ultimately, we took the risk and it helped us buy our forever home. (And thanks to our great buyer’s agent, we closed on both homes the same day) However, not all buyers can afford to do it that way, and for sellers, an ultimatum is not the only approach to getting the security they want in a contract. Instead, they can use a kick-out clause. So, what is a kick out clause?
A kick out clause added to a real estate contract says that if the seller receives a better offer, the contracted buyer has a designated period of time, normally 72 hours, to waive the contingency or be “kicked out” of the contract by the seller. At which point, the seller could negotiate other offers.
Why would a seller want to use a kick-out clause?
A seller takes a risk by accepting an offer with contingencies. They allow the buyer to back out of the contract if the terms of the contingency weren’t met. The seller especially is taking a risk if that contingency is the sale of their existing property as this could take quite a bit of time or may not happen at all. The kick out clause allows a seller to continue to show the home to other potential buyers and receive back up offers. It also gives a seller the ultimate compromise by providing the security of having a contract in place, but allows them to continue to look for other buyers with less risk.
What about the buyer?
Unfortunately, if the seller wants to include the kick-out clause, there isn’t much the buyer can do because they likely aren’t in a position to waive their terms. If it wasn’t for the security of the clause, the seller may have declined their offer entirely. However, the buyer does need to keep in mind what might happen if another buyer comes along and consider other alternatives such a bridge loan or home equity line of credit.
What if a better offer does come in?
If a seller does receive another offer that they are ready to act on, they can request that the current buyer waive the contingency within the time period set in the contract. So in the case of needing to sell their existing residence, the buyer would need to figure out if or how they could afford the home without the proceeds from the sale of their current residence. This normally requires documented proof to satisfy the seller, likely from a lender. If the buyer is unable to waive the contingency within the window provided, they are effectively kicked out of the contract and the seller is free to negotiate with others.
Read the fine print
As it is with every real estate contract, reading the terms carefully or having them reviewed by an attorney is important for both the buyer and the seller. Even if the contingency to sell the current property is waived, if the buyer can’t afford it, they could still back out under the financing contingency or other contingencies included in the contract. A properly drafted kick-out clause is important and should note what is considered satisfactory evidence if invoked.
What happens to the earnest money?
If a kick out clause is used, the buyer should receive their earnest money back in full. However, this is another one of those things that should be made very clear in the kick-out clause contract wording to make sure there is no ambiguity.
In the end, it’s a good alternative
Unless it’s a first time home buyer, it’s likely the majority of potential buyers will have a home to sell at the same time they are buying. A kick-out clause can be a great compromise between a buyer, who can’t purchase a new home without the sale of their current property (or in my case, just didn’t want to live with two mortgages), and the seller, who is likely to turn their nose up at an offer with contingencies unless they are able to protect their best interest as well.