Kick Out Clause Real Estate and How Does It Work?
By: ROS Team
In the fast-paced world of real estate, navigating offers and contingencies can feel like a high-stakes game. If you’re buying a home and selling one at the same time, you might be familiar with the concept of a contingency clause. But what happens if a seller receives a great offer on your dream house while you’re still working on selling yours?
Enter the real estate kick out clause, a provision that can shake things up for both buyers and sellers. Let’s dive into what is a kick out clause in real estate and how it works in a real estate transaction.
What Is a Kick Out Clause in Real Estate?
A real estate kick out clause is a provision found in sales contracts. It comes into play when a seller receives a contingent offer for the property.
A contingent offer means the buyer’s purchase depends on certain conditions being met. A common condition is that the buyer must sell their current home before buying a new one.
The buyer submits an offer on the house, including this contingency clause in the contract. The seller may accept this offer, especially if it has attractive aspects like a higher price than asked or a substantial earnest money deposit.
However, the seller may wish to keep their options open. This is where the kick-out clause comes in. With this clause included, the seller can continue showing the house and considering other offers. If they receive a stronger offer without contingencies, the kick-out clause permits accepting that offer.
This essentially means removing the first buyer from consideration. However, the first buyer typically gets a chance to remove the contingency from their initial offer to compete with the stronger one. If they can’t or choose not to remove the contingency, the sale with them falls through, and the seller proceeds with the new offer.
How Does A Real Estate Kick Out Clause Work?
When buying and selling properties simultaneously, timing is crucial. Delays can create uncertainties. This is where a kick-out clause becomes invaluable. It is a contingency added to real estate contracts. If a seller accepts an offer with a kick-out clause while already under contract, they can remove the first buyer if a better offer arrives.
The process works like this:
If the seller receives a non-contingent offer while under contract with a buyer having a kick-out clause, they must notify the first buyer. The first buyer then has around 72 hours to decide if they want to remove their contingency and proceed or walk away. If they proceed, the seller chooses which offer to accept.
A common contingency used with a kick-out clause is the home sale contingency. It allows buyers to back out if unable to sell their home within a set timeframe. If the first buyer walks away, their earnest money is returned, and the seller can contract with the second, non-contingent buyer.
Pros and Cons of a Kick-Out Clause for Sellers and Buyers
For Sellers:
Pros:
- More Flexibility: Sellers can continue showing the house and consider other offers.
- Potentially Higher Price: A kick-out clause can spark a bidding war if a stronger offer emerges.
- Faster Sale: If the first buyer can’t remove the contingency, the seller can move on to a ready buyer.
Cons:
- Uncertainty: The seller might lose both buyers if the first buyer can’t remove the contingency and the second buyer backs out.
- Offending Buyers: Some buyers might be discouraged by the lack of guarantee.
For Buyers:
Pros:
- Competitive Edge: A contingent offer with a kick-out clause might be more attractive to sellers in a competitive market.
- Security: Buyers can secure their dream home while still selling their current one.
Cons:
- Stressful: The buyer faces the possibility of losing the house to another buyer.
- Pressure to Remove Contingency: The buyer might feel pressured to remove the contingency (like selling their home quickly) to compete with a stronger offer.
Is There Any Risk of Having a Kick Out Clause in Real Estate Contracts?
Yes, kick-out clauses carry risks for both sellers (losing both buyers) and buyers (losing the house or facing pressure to waive contingencies). However, clear communication and carefully crafted clauses can help mitigate these risks.
Who Should Consider Proposing A Kick-Out Clause?
A kick-out clause can be advantageous for both sellers and buyers in certain circumstances:
Sellers Selling Contingent on Buying Another Property: Sellers who need to buy another property before selling their current home may propose a kick-out clause. This safeguards them if a better, unconditional offer arises.
Buyers with a Home Sale Contingency: Buyers with a contingency to sell their existing home first could suggest a kick-out clause. It makes their offer more appealing to the seller while allowing them a chance to secure the new property.
Sellers in a Competitive Market: In competitive markets, where multiple bids are common, sellers may recommend a kick-out clause. It keeps their options open if a stronger, non-contingent proposal appears.
Buyers in a Seller’s Market: Similarly, buyers in seller’s markets with limited inventory could propose a kick-out clause. It enhances their offer’s appeal to the seller, yet protects their interests.
Is a Kick Out Clause Common?
Yes, kick-out clauses are increasingly common in real estate transactions, particularly in buyer’s markets where houses may linger on the market for extended periods. Sellers use kick-out clauses to maintain flexibility and continue marketing their property while under contract, safeguarding their interests in case a better, non-contingent offer arises.
Kick Out Clause Real Estate: Takeaway
To summarize, a real estate kick out clause can offer advantages in real estate transactions, allowing sellers room to maneuver while potentially benefiting buyers in competitive environments. Nonetheless, it is crucial to understand the prospective drawbacks for both parties.
If you are considering a kick-out clause, it is recommended to consult a real estate professional to guarantee the clause is articulated clearly and safeguards your interests during the buying or selling process.