What Is a Kick-Out Clause?
Nov 13, 2019
When it comes to houses, the term “kick out” probably doesn’t have the best connotation.
However, a “kick-out clause” is actually a very common stipulation added to sales contracts when selling a house.
Whether you’re selling your house or you’re a homeowner who will soon be moving, it’s important that you understand what a kick-out clause entails.
The Simple Definition of a Kick-Out Clause
“In real estate, if a property is marked as “contingent”, it means that an offer has been made and the owner accepted it.
However, it’s contingent – instead of “sold” – because one or both parties have requested certain provisions which the other party has yet to approve.”
One common type is a home-sale contingency, which means that the sale is contingent upon the buyer selling their home first. In other words, the buyer wants the seller’s house, but they don’t want two mortgages. So, the sales contract effectively says, “The buyer will officially purchase the home on or before xx/xx/xx if they’ve sold their home. If they haven’t, the sale is dissolved.”
With a kick-out clause added to the sales contract, the seller agrees to this contingency, but they also reserve the right to continue marketing the house. Furthermore, if they receive another offer, the buyer will only have 72 hours to remove the contingency. Otherwise, the seller can accept the new offer.
3 Advantages of a Kick-Out Clause
While kick-out clauses may seem to favor the seller, buyers often insist on them, too.
Here are three advantages they bring to the table.
1. Low-Risk Sale
Again, the benefits for the seller are obvious.
The main one is that they lock in a buyer but can also cancel the contract if another offer shows up. That’s peace-of-mind any seller would love to have.
It works out well for buyers, too. Imagine finding your dream home before you’re able to sell your current property. If not for a kick-out clause, most people would have to take on two mortgages until they were able to sell their first house. The only alternative would be giving up on that dream house.
Neither option is ideal, which is why many buyers welcome kick-out clauses.
2. Marketing Opportunities
Sellers also love that they can continue marketing their property despite the fact that they’ve already accepted an offer.
They can even accept higher offers from another buyer. Even though the “right of first refusal” would mean the original buyer gets the chance to match it before losing the house, the seller still comes out ahead.
3. Room for Negotiation
Finally, if you’re the seller and a buyer asks you for a kick-out clause, you should probably feel entitled to negotiate a bit. Clearly, the buyer really wants your home.
A common demand for sellers in this situation is simply an aggressive timeline for the buyer to move forward. If you anticipate more offers are on their way, you’ll have even more leverage with which to pressure the buyer into selling their house ASAP, so you can finish the sale.
3 Disadvantages of a Kick-Out Clause
Kick-out clauses aren’t always a good idea, though.
Again, it may seem like sellers would be foolish to forego them, but kick-out clauses could backfire for either party.
1. Losing the House
Ideally, if you’re a homeowner looking to move, you’d love to accept an offer before immediately turning around and making one on another house. There would be minimal (if any) overlap in your homeownership, meaning you wouldn’t have to shoulder two mortgages for long.
While a kick-out clause may seem like your second-best option, it also means you could lose the house if the seller receives another offer.
As a result, buyers need to be especially careful about pricing their homes competitively. Every day it remains on the market is one more day that someone else could make an offer on the seller’s house.
2. Losing an Offer
The right of first refusal means that sellers can’t just accept an offer if they’ve already entered into a contract with another buyer, even with a kick-out clause in place.
Instead, they have to give the initial buyer a certain amount of time to match it.
If you’re the seller, this probably doesn’t seem like a bad thing. Either way, you get the greater amount, right?
While we did list that as one of the advantages of a kick-out clause, there is a chance that both offers could fall through.
Say, you agree to sell your house to a buyer for $250,000, provided they sell their house in the next 60 days.
Then, the following week, another buyer offers you $265,000. You let the initial buyer know. They agree to match it, even though it means taking on two mortgages. You give the second buyer the bad news and prepare for the sale of your home.
Unfortunately, you might find out too late that your initial buyer can’t actually secure financing for two mortgages. Now, you’re out both offers.
3. Losing the Sale
This is why sellers should include language in their sales contracts that void the agreement if the buyer can’t move forward because they are unable to secure financing.
That way, if you receive a better offer, you can first require that the initial buyer prove they will, in fact, be able to buy the home with the help of a lender. For example, demand that they get preapproved for the loan while they still have their current mortgage.
Are You Thinking About Selling Your House?
While kick-out clauses aren’t always necessary, it’s helpful to understand how they work in case you receive an offer from someone who wants to sell their own house first.
Of course, as you now know, it’s not always in your best interest to include such a clause. An experienced real estate agent can recommend when it makes the most sense.
At SimpleShowing, we’d love to help you connect with such an agent. Best of all, we only charge a 1% fee to list your home. Contact us today and we’ll explain how simple it is to use our platform.