The Kick-Out Clause: A Useful Tool for Sellers
Imagine this: you’re selling your home and someone presents you with an offer that is contingent upon their home selling first. You’re told to take your home off the market for an indefinite period of time and cross your fingers that the buyers’ home sells before closing. If it doesn’t, the buyer can walk away without any repercussions.
Doesn’t sound very appetizing, does it? That’s why many sellers utilize a kick-out clause to mitigate the risks associated with a home sale clause.
What is a kick-out clause?
A kick-out clause allows a seller to receive offers and market their home despite having accepted a previous offer. In the event that the seller receives an superior offer, the seller can request that the initial buyer remove all contingencies associated with their offer. If the buyer refuses to remove all contingencies, the seller is free to back out of the contract without penalty and sell to their home to the new buyers.
The kick-out clause is often added to a home sale amendment because it allows the seller to mitigate some of the inherent risks associated with the home sale amendment. A home sale amendment creates a considerable amount of risk for the seller because the buyer must sell their current home for the sale to proceed. The seller doesn’t want to be responsible for an event that they have no control over.
A kick-out clause can also require that the buyer put down an additional amount of earnest money upon removing all contingencies. This provides some added security for sellers, as they are able to collect more money in the event that the buyer defaults.
Benefits for the Seller
With a kick-out clause, sellers are able to continue marketing their property when it’s under contract. They can hold out for a better offer and keep their options open. Upon receipt of a satisfactory offer, they can then force the buyer to either forgo their contingencies and pony up more earnest money or walk away. A kick-out clause undoubtedly benefits a seller more than a buyer.
Also, a seller is under no obligation to accept the new offer should they cancel the initial buyer’s contract. Perhaps there was an uptick in the market they are now able to fetch an even higher offer.
A seller could also be incentivized to find another buyer if the current buyer seems flaky or is bothersome to deal with. Sellers without a kick-out clause don’t have this luxury, they have to deal with the buyer unless there’s a way to easily void the contract.
Benefits for the Buyer
I’ll be honest: there aren’t many benefits for a Buyer under contract with a kick-out clause. However, the mere existence of the kick-out clause benefits buyers who wouldn’t ordinarily get their offers accepted.
For example, an offer with a home sale clause isn’t very attractive to sellers in a hot market. However, a kick-out clause combined with extra earnest money could make the difference. Some buyers may be able to use the kick-out clause to strengthen their offer and ultimately get it accepted.
Risks for Sellers
Kick-out clauses may sound like the best of both worlds for sellers: they’re are able to keep an offer in their pocket while still remaining open to additional offers. However, there are some risks for sellers to take into consideration.
A kick-out clause may deter potential buyers. Most MLS display a special status for properties that under contract but have a kick-out clause. This status may deter potential buyers because they believe that a bidding war will take place if they make an offer. Also, the property may disappear from some searches because it no longer has a status of “Active”. When real estate agents are browsing homes for clients they often times filter out any of the properties that have a “Pending” or “Contingent” status.
Additionally, the listing agent may no longer feel as if they need to aggressively market your home when under contract with a kick-out clause. If they already have an offer, some under-achieving agents may be fine with sitting back and seeing if any additional offers come in. Any sellers should ensure that their listing agent continues to aggressively market the property when it is under contract with a kick-out.
Risks for Buyers
The biggest risk for a buyer is the uncertainty that comes with a kick-out clause. The kick-out clause creates a situation where the seller is incentivized to obtain a superior offer. They can force a buyer to either forfeit all of their contingencies and put up more earnest money or lose out on the home.
Essentially, buyers risk temporary homelessness with a kick-out clause. A buyer could already have their home under contract when the seller finds a better offer. If that buyer is kicked out of the contract they now have to sell their home without a place to live after closing. The buyer now has to pay for temporary housing and frantically search for another home.
The buyer also risks losing money on inspections or appraisals. It is not standard for the buyer to be reimbursed for these expenses by the seller in a kick-out clause situation, meaning that the seller could obtain a superior offer and leave the buyer footing the bill. A kick-out situation means the buyer is vulnerable to someone else swooping in and losing out on all of the time, money and effort they’ve invested in the house thus far.
Tips for Sellers
- Investigate the buyers’ current home listing. Is it overpriced for the area? Are they trying to sell their home themselves instead of using a real estate agent? These are relevant questions because it’s now in your interest for their house to sell quickly.
- Consider writing a stipulation that permits you to share any home inspection report or appraisal commissioned by the buyer. If another buyer comes along, they may accept the report and agree to a sooner closing.
- Shorten the amount of time the initial buyer has to remove all contingencies once you obtain a new offer. The typical period is 72 hours, but you could shorten that to 24 or 48 hours in the contract.
- You can market your home in an interesting manner when it is under contract with a kick-out clause. Try to create urgency in other buyers by implying that the home is “almost sold” unless they’re able to put in a better offer quickly.
Tips for Buyers
- Don’t include the kick-out clause in your initial offer because the seller may be willing to accept a home sale contingency without a kick-out clause. If the seller rejects your offer the kick-out clause can then be framed as a compromise.
- Be wary of agreeing to a kick-out clause if you’ve found a buyer for your current home and it’s under contract. You don’t want to be in a situation where you’re kicked out of a contract without a home to live in.
- Consider requesting that the seller reimburse you for the home inspection and appraisal cost if the contract is voided. This will make sure you’re made whole in the event the seller kicks you out of the contract after finding a new buyer.
- Shorten the period that the kick-out clause can be used. This will provide you with some peace of mind that there won’t be a surprise buyer entering the mix just before closing.
- If the seller finds a better offer, you’re faced with removing all contingencies in order to keep the contract alive. The contingencies that you may forfeit include due diligence, financing, and appraisal. Make sure you’re able to forgo these contingencies before agreeing to do so.
Curiously, I find that there are parallels between the kick-out clause and romantic relationships. I imagine the seller as being the more attractive partner within a relationship; someone who has very clearly compromised because they are afraid to be alone. So, what do they do? They keep an open eye for an upgrade.
When something better comes along, they can either double down with marriage or they can branch swing and move on to greener pastures; thereby “kicking out” the previous partner from their life. However, there’s always the possibility that something better never comes along and they’re forced to stick with what they have.
I suppose all is fair in love and... real estate transactions.