How a Kick-Out Clause Can Protect You—or ‘Kick You Out’
When it comes to buying or selling a home, timing is everything. It’s easy to find yourself in a situation where you are attempting to sell your old home while simultaneously trying to buy your next home. In this case, a kick-out clause, which is also referred to as a home sale clause or sale contingency can be a helpful tool if you’re trying to time a transaction properly.
Whether you’re buying or selling, it’s important to understand the ins and outs of a real estate contract. Read on to learn everything you need to know about how a kick-out clause affects a real estate transaction, including the advantages it offers to both the seller and the buyer.
What Exactly Is a Kick-Out Clause?
Buyers will often add a home sale contingency as part of the sales contract, which is one of the most common contingencies in real estate. This gives the buyer a specified amount of time to sell their old home in order to move forward with the purchase of a new one. A kick-out clause enables the seller to continue marketing their house if they receive an offer from a buyer with contingencies.
The kick-out clause lets the seller continue showing their home to other interested parties in hopes of receiving a non-contingent offer. A non-contingent offer means that the buyer’s offer does not depend on any conditions that need to be met before the sale can be completed. With a kick-out clause, if the seller receives a more favorable second offer, they may have the option to “kick out” the initial buyer, as the name implies.
It’s typically more common to see kick–out clauses when it’s a buyer’s market versus a seller’s market. This is because seller’s markets have more competitive conditions. While a kick-out clause is not a mandatory component of a real estate transaction, many sellers and buyers feel more comfortable including one in an offer as a way to protect themselves.
An Example of How a Kick-Out Clause Works
To give more insight into how a kick-out clause works, let’s say that a home seller has listed their home and receives interest from potential buyers, one of whom makes an offer. However, that buyer is unable to move forward with the new home purchase until their own home has sold. In this case, the seller most likely will not want to take their home off the market in case the buyer is unable to sell their old home within the needed timeframe.
This is where a kick-out clause can come into play. A seller can accept a contingent offer from a buyer and add a kick-out clause into the purchase contract, which enables them to keep their house on the market. If the seller receives a better offer, they have the option to kick out the contingency buyer if that first buyer cannot match the amount of money offered by the second buyer.
What Does a Kick-Out Clause Mean for the Seller vs. the Buyer?
Adding a kick-out clause to the sales contract impacts both the buyer and the seller, but in different ways. Here’s how:
Kick-Out Clause from the Seller’s Point of View
From the seller’s perspective, a kick-out clause can be beneficial by providing a way for them to get the best offer in a timely manner. For example, a seller might like components of the buyer’s offer but still want to keep their options open in case a better offer comes along. This commonly happens during a buyer’s market.
A kick-out clause can help protect the seller by enabling them to continue marketing and showing their home to other potential buyers.
If the seller does receive a second offer from a potential buyer, they have the option to accept the backup offer or continue with the original offer. Either way, it’s the seller’s responsibility to notify the first buyer of the second buyer’s proposed offer.
Kick-Out Clause from the Buyer’s Point of View
During a buyer’s market, some homebuyers will add a home sale contingency when they make an offer. This is a common type of contingency and means that the sale is contingent upon their ability to sell their current home first. Adding this contingency can help protect buyers financially so they will not end up paying two mortgages.
Say the buyer makes an offer on a home with a kick-out clause. Then, if the seller receives a better offer from a second buyer, the first buyer will be notified of the offer and will have the option to remove the contingency clause and give the seller additional earnest money if they want to keep the contract in place. The time frame that the buyer has to decide is specified in the sales contract. It’s typically around 72 hours, but the amount of time varies from one real estate transaction to the next.
What Are the Advantages of a Kick-Out Clause to Both Sides?
A kick-out clause undeniably protects the seller’s interests. However, adding a kick-out clause to a sales contract can be advantageous for both parties — here’s a closer look.
Advantages to the Seller
A kick-out clause can benefit the seller in a number of ways, including:
- Allows them to continue marketing: A kick-out clause enables a seller to keep their house on the market even though they’ve entered into a sales contract. This opens the door to receiving a better offer with no contingencies. If a better offer comes along, sellers have the right to accept the more favorable offer after notifying the first buyer and if the appropriate amount of time has passed.
- Reduces the risk of needing to relist: By adding a kick-out clause, sellers can continue to keep their home on the market and, if the contract falls through, this means they won’t have to relist their property.
Advantages to the Buyer
Not only does a kick-out clause benefit the seller, but it can provide a safety net to the buyer. A kick-out clause helps the buyer because it:
- Protects them financially: Having a kick-out clause can help prevent the buyer from taking on two mortgages and gives the buyer time to sell their old home. It also protects their earnest money if a new potential buyer makes a better offer than they can. Earnest money refers to a sum of money a buyer will put down to show that they’re serious about purchasing, and it can act as a deposit. However, a kick-out clause can also pose a risk to the buyer of losing out on their dream home if another potential buyer comes along with a non-contingent offer.
- Provides time to resolve their contingencies: In a situation where a new buyer offers a higher purchase price, the original buyer will have the chance to decide if they want to match the higher offer or withdraw their offer.
Aalto Is Ready to Help You Find Your Dream Home
Understanding how a kick-out clause works and the advantages to both the seller and the buyer can be complicated, especially if you’re a first-time buyer. However, it’s important to educate yourself on what this means in the sales contract so you can prepare yourself for the possibilities.
If you have any questions, Aalto is here to provide support along the way so you won’t need to rely on a traditional real estate agent. Our self-service platform provides a user-friendly option for both buyers and sellers. We work directly with sellers and buyers to make the real estate process as simple and straightforward as possible.
Whether you need advice on how much to set your home’s asking price for or information about what is included in a sales contract, our licensed professionals are available to provide valuable insight and resolve any questions you might have during your real estate transaction.
At Aalto, we work with you, on your terms and on your timeline. Whether you are ready to sell your home right now or simply want to learn more about the process, head to aalto.com to learn more.
Aalto is a real estate broker licensed by the State of California, License #02062727 and abides by Equal Housing Opportunity laws. This article has been prepared solely for information purposes only. The information herein is based on information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy of the information. Aalto disclaims any and all liability relating to this article.