Should Homebuyers Ever Have a Kick-Out Clause?
A kick-out clause is a clause written in real estate contracts, usually in the context of home sales. It applies when someone has made a contingent offer to buy the house. The kick-out clause says that the seller can continue showing the home and can accept a new offer that comes without contingencies, effectively “kicking out” the contingent offer if a stronger one comes along. For help with planning to buy a home, consider working with a financial advisor.
What Is a Kick-Out Clause?
In real estate, it’s common for people to make an offer with what are known as “contingencies.” These are conditions that must be met before the buyer will go through with their purchase of the house. If the conditions listed in a contingency aren’t met, then the buyer can withdraw from the purchase and will receive their deposit money back.
For example, smart buyers always include the home inspection contingency. This clause says that the buyer has the right to have the home professionally inspected before completing the sale. Based on the results this inspection, the buyer can either request repairs or back out of the deal entirely.
Buyers can include any contingencies they want when they make an offer to buy a house. If the seller accepts the buyer’s offer, those contingencies will be included in the contract for sale.
Absent other conditions, once a seller accepts the buyer’s offer they must take the home off the market. They cannot formally show the house or accept legally binding offers from other buyers, because they have already signed a contract to sell the house to someone else. This is true even if the contract for sale includes contingencies.
This can put sellers in a difficult situation. If a buyer exercises their contingencies and backs out of a sale, the seller has to relist their house and start all over. This can be a problem if the housing market cools off, if the length of a home’s listing time harms future offers, or if the seller simply needs to sell the house and move on.
A kick-out clause attempts to address this issue from the seller’s end.
A kick-out clause is a corollary clause that the seller can include in a contingent contract for sale. It allows the seller to keep formally showing the house and accepting new offers, ideally looking for one that will not include certain contingencies. If they receive an offer with no contingencies, the seller can accept that in place of the existing contract for sale. This effectively “kicks out” the original buyer and replaces them with the new offer.
In doing so, this gives the seller a measure of protection. It allows them to accept a contingent offer, while still looking for a better deal. It also allows them to keep marketing the house in case the contingencies go wrong and they have to find a new buyer. With this clause, they won’t have to start all over again because the house never came off the market.
How Do Kick-Out Clauses Work?
In most, if not all, cases, a kick-out clause includes what’s known as the “right of refusal.” This means that if the seller receives a non-contingent offer for the house, they have to give the original buyer notice and an opportunity to amend their offer.
In most cases the buyer has 72 hours to decide if they want to remove their contingencies and proceed with the sale anyway. If not, the original sale is cancelled. The buyer receives their deposit money back and the seller can proceed with the second offer. If so, the second offer is annulled and the original contract will now skip the relevant conditions for purchase.
It is also relatively rare for sellers to write a blanket kick-out clause allowing them to accept any better offer. Few buyers would accept that. For example, it would be rare to see a buyer accept a kick-out clause based solely on accepting a higher sale price or waiving an essential contingency like home inspection.
Instead, most kick-out clauses address specific, high-risk contingencies in the contract for sale. The most common is what’s called a home sale contingency.
With a home sale contingency, the buyer gets a certain window of time to sell their own house before completing the purchase of the new house. Usually this window is 90 days. If the buyer can’t sell their house in the given window of time, then the contract for sale is annulled and the seller has to relist their house. Buyers like this contingency because it lets them avoid the risk of carrying two mortgages, and because many of them count on using the money from selling their old house to pay for the new one.
While home sale contingencies are rare in a hot market, even in a buyer’s market few sellers will accept this contingency without a kick-out clause.
Should You Have a Kick-Out Clause?
The answer is … it depends.
As a buyer, you should never accept a kick-out clause for basic rights and responsibilities. Even if it is legal for the seller to request, you should never allow a kick-out clause for contingencies like home inspection, rights of refusal, financing and appraisal. These are essential to protecting yourself.
You also should never accept a kick-out clause based on the seller simply receiving a better offer. While you may have made a strong case, you don’t want the seller leveraging your offer into a better one. Although, that said, this would be an extremely valuable clause to get as a seller. It may not be legal, since real estate law is extremely state-specific, but if your jurisdiction allows and your buyer will accept it, a better offer kick-out clause would certainly be welcome.
However, a kick-out clause can be very valuable when it comes to higher-risk contingencies like home sale. In this case, it can allow each party to get some of what they want rather than having to walk away from an all-or-nothing deal. If the buyer needs a high-risk contingency, it allows their offer to move forward when the seller otherwise might not have accepted it at all. At the same time, a kick-out clause can allow the seller to accept an attractive offer without having to take on too much risk in the process.
Kick-out clauses are relatively rare in a hot seller’s market because, at time of writing, most sellers can afford to refuse most contingencies outright. In more normal markets, however, they can be very valuable in specific circumstances.
The Bottom Line
A kick-out clause is a provision in a real estate contract that lets sellers accept a contingent offer while continuing to show the property and field offers. If they accept a second offer, the buyer can either remove their contingencies or get “kicked out” in favor of the new offer.
Homebuying Tips
If you’re a first-time homeowner, property taxes may come as a shock to you. Don’t walk into that expense blind. Instead, use SmartAsset’s calculator to figure out your taxes in advance … before you make an offer.
A financial advisor can help you with your homebuying search. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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