What Is a Kick-Out Clause in Real Estate?

Understanding Contingencies in Real Estate

Real estate contingencies are specific conditions that must be met to enforce a contract. A contingency may be in place to protect buyers or sellers. With a contingency offer in place, the seller or buyer can back out of the deal if the contingencies aren’t fulfilled.

Common Types of Contingencies

The real estate industry includes many types of contingencies. Here are some of the most common contingencies you might find in a real estate contract:

• Appraisal: An appraisal contingency allows the contingent buyer to withdraw from a signed contract if the property fails to appraise for the sale price. If the buyer decides to pay the difference in cash, they may still purchase the property.
• Inspection: An inspection contingency allows the buyer time to schedule a professional property inspection. It may also enable the buyer to negotiate or cancel the sale based on the inspection results.
• Financing: A financing contingency allows potential buyers to submit an offer based on the ability to obtain financing. If the buyer fails to receive loan approval, they can withdraw from the contract.
• Sale of Existing Home: An existing home sale contingency gives the buyer time to sell their house. Once the buyer sells their own house, they can continue with the original contract and purchase the seller’s house.

The Kick-Out Clause

A kick-out clause is a specific contingency that allows a home seller to accept a backup offer if the initial buyer has not fulfilled the listed contingencies.

With a kick-out clause, the buyer agrees to void the contract if the seller receives a better offer from another buyer or real estate agent.

How it Works

A kick-out clause allows a seller to withdraw from a signed purchase agreement if the potential buyer has not yet fulfilled its contingencies.

For example, a buyer submits a purchase agreement on a seller’s house with a home sale contingency, meaning they must first sell their home to finalize the sale. The seller agrees to the terms with a kick-out clause. The first buyer doesn’t receive any fair offers from other buyers on their home for many weeks, leaving the seller in a transitional limbo.

In the meantime, the seller continues showing their home, and they receive a second fair offer without contingencies. They activate the kick-out clause and take the second buyer’s offer instead.

Kick-out clauses require the seller to take specific steps to exercise their legal rights. For example, the seller must notify the first buyer in writing of the voided purchase agreement and promptly return the buyer’s earnest money. Usually, the seller’s attorney or real estate agents will notify the first buyer of the offer from another buyer.

In some cases, the initial buyer has the opportunity to respond, which is usually around 72 hours or two to three business days. The buyer decides if they want to or can purchase the home without their initially listed contingencies. Otherwise, the first buyer agrees to cancel the contract, and the sale will continue with the new buyer.

Benefits and Drawbacks for Sellers

Kick-out clauses offer sellers an option to back out of a home sale contingency. However, it’s important to consider the following advantages and disadvantages before including a kick-out clause in your agreement.

Advantages of a Kick-Out Clause

The biggest benefit of a kick-out clause for sellers is the ability to continue marketing the property while waiting for the first buyer to fulfill their contingencies. By continuing to market the property, sellers can reach more buyers and potentially secure a better offer, which may mean fewer contingencies and a faster closing.

Disadvantages of a Kick-Out Clause

Some buyers may be discouraged by offers with kick-out clauses, which could ultimately lead to losing the first buyer. If the seller accepts another offer, they’ll have to find a new property. Additionally, sellers may find the process too overwhelming to deal with multiple offers and contingencies.

Benefits and Drawbacks for Buyers

Kick-out clauses also offer advantages and disadvantages to buyers, including the following.

Advantages for Buyers

A purchase agreement with a kick-out clause can help buyers secure a more desirable property, even with multiple contingencies. 

Kick-out clauses also provide an option to back out from the agreement if necessary, such as if the buyer cannot sell their current home or obtain financing for the new deal. With a kick-out clause, the buyer receives their deposit money back. Ultimately, it is the buyer’s decision.

Disadvantages for Buyers

The most significant disadvantage of a contract with a kick-out clause for the buyer is the possibility of losing the property. 

If the buyer cannot fulfill their contingencies in time, and the seller receives another offer from a second buyer, they may take advantage of the kick-out clause. A sales contract with a kick-out clause could also pressure the buyer to sell their current home faster, sometimes accepting a less competitive offer.

Negotiating a Kick-Out Clause

Most real estate contracts can be negotiated better to meet the needs of the buyer and the seller.

Key Terms and Considerations

Whether you’re the seller or the buyer, it’s essential to evaluate the specific terms of the kick-out clause before signing. Review the time frames included with the contingent contract. Consider if and when the seller can continue showing the property or accepting offers.

As a seller, it’s important to compare the first offer with backup offers. For example, a non-contingent offer from a second buyer may offer less. 

Negotiations might include lengthening the contingency timeframe or allowing the first buyer to increase their initial offer after the seller receives a backup offer. The buyer and seller should also review any financial penalties for backing out of a contingent offer. 

The Importance of Legal Counsel

Always have a professional review of any real estate contracts before signing them. To protect your interests, work closely with a real estate attorney to understand the rules and implications of kick-out clauses. Carefully review anything the buyer asks before the buyer puts it in the agreement.

Alternatives to a Kick-Out Clause

Real estate contracts with kick-out clauses can help protect buyer and seller rights. However, they may only make sense in some contingent offers. Here are a few alternatives to consider to kick-out clauses.

“Time is of the Essence” Clause

Time of the essence refers to a contract clause that dictates a specific period in which both parties must meet and complete their contractual obligations. Failing to meet these contingencies is a breach of contract that can void the agreement, and the seller may re-list the property.

This allows the seller to set a home sale contingency period and withdraw from the agreement if the buyer does not meet the listed timeline.

Contingency with Escape Clause

A contingency with an escape clause allows either party to cancel a contract if the listed conditions are not met. For example, the original buyer may submit a contingent contract based on their ability to secure financing. They can withdraw from the contract without recourse if they cannot obtain a mortgage loan.

Sellers can also benefit from a contingent offer with an escape clause. For example, they can use an escape clause to continue to market the house until the original buyer fulfills their obligations. Depending on market conditions, this could allow them to secure a second offer at a higher price.

Contact A-List Properties for a More Flexible Selling Process

A kick-out clause can be a valuable tool that increases the seller’s ability to obtain an attractive offer for their home. Kick-out clauses also allow buyers to put an offer on the house for sale without being locked into the contract if they can’t meet certain contingencies.

Kick-out clauses offer buyers and sellers more flexibility, but they come with advantages and disadvantages.

A-List Properties offers sellers a more flexible process. Sell your house without contingencies while still receiving a fair offer.

Contact us today at (972) 526-7042 to sell your house fast. You can also complete our online form and receive a fair cash offer.