What Is A Kick-Out Clause?

When you’re buying a home, it’s common to request certain contingencies be included in your purchase agreement to protect you. But a purchase agreement must also protect the seller, and that’s where a kick-out clause comes in. It allows a buyer to have contingencies added to the deal while also helping the seller ensure they’ll ultimately be able to sell their home.

Whether you’re buying or selling a home, it’s important to understand what a kick-out clause is, how it affects each party and whether you should include one in your purchase agreement.

What Is A Kick-Out Clause In Real Estate?

In the home buying process, a kick-out clause is an element of a contingent offer that allows the seller to entertain offers from other buyers. If the seller decides to accept another offer on the house, the original buyer can either be removed from consideration (kicked out) or nullify the contingencies placed in their original offer.

A kick-out clause gives a seller more protection and flexibility when entering into a deal. Purchase agreements often include contingencies for the buyer but not similar protections for the seller. A kick-out clause gives the seller the ability to “kick out” a buyer if they don’t agree to remove certain contingencies after a seller receives a different noncontingent offer.

Kick-out clauses are most beneficial for sellers. While purchase agreements often include several contingencies to protect buyers, sellers may feel they don’t have the same protection. A kick-out clause offers a compromise of sorts, allowing a buyer to have their contingent offer accepted while still allowing a seller the piece of mind that they’ll be able to sell their home on a reasonable timeline.

How Kick-Out Clauses Work

When a buyer and seller enter into a purchase agreement, they often include contingencies that allow a buyer to back out in certain situations, such as if the appraisal or inspection reports aren’t what was expected. If a contingency is met, the buyer can back out of the sale without any negative repercussions.

When a kick-out clause is included in a purchase agreement, the buyer still has the right to back out of the deal in certain situations. However, the seller has the right to continue showing the house to other prospective buyers. If another buyer makes a noncontingent offer, the seller can give the buyer the opportunity to remove their contingencies. If the buyer declines, the seller can walk away from the deal with the original buyer to accept the new offer.

Kick-out clauses usually have a timeline attached to them, such as 72 hours or 48 hours. This period is the amount of time the buyer has to either remove their contingencies or back out of the deal.

For example, let’s say Jane is selling her home to Bob. Jane likes Bob’s offer more than the rest, but he’s also requested a home sale contingency. In other words, Bob owns a home that he must sell in order to buy Jane’s house. The home sale contingency allows Bob to back out of the deal if he isn’t able to sell his current home.

Jane wants to accept Bob’s offer, but she feels uncomfortable knowing the deal might fall through if Bob can’t sell his home. Jane requests to include a kick-out clause in the purchase agreement. This allows her to entertain offers from other buyers. If someone makes a competitive offer with no home sale contingency, Bob has the opportunity to either remove his home sale contingency or back out of the deal, allowing Jane to accept the noncontingent offer.

Kick-Out Clause Implications For Sellers

As a seller, a kick-out clause offers you added protection and peace of mind. Though you take on some risk when you accept a contingent offer, including a kick-out clause in your purchase agreement ensures that you’ll still have the opportunity to bypass those contingencies, either with a different offer or by having the buyer remove their contingencies. In the end, it gives you greater confidence that you’ll be able to sell your home on your expected timeline.

Kick-Out Clause Implications For Buyers

As a buyer, a kick-out clause could result in you being forced to either remove your contingencies from your purchase agreement or walk away from the deal. Unfortunately, this type of clause could result in you losing out on the home. The good news is that, just like if you walked away from the deal because of a contingency, you’ll still recover your earnest money.

Pros And Cons Of Including A Kick-Out Clause

As a buyer, there are some pros and cons to including a kick-out clause in your purchase agreement. Though these clauses are primarily designed to protect sellers, they may offer you some benefits as well.

Benefits Of A Kick-Out Clause

• Easier time having an offer accepted: Some sellers may be less likely to accept offers with contingencies included. A kick-out clause could make a seller more likely to accept a contingency offer, such as from someone trying to buy a house while selling a home.
• Ability to walk away with your earnest money: Though a kick-out clause presents some risk for the buyer, they are also protected. For example, if the buyer decides to walk away when the seller gets another offer, the buyer gets their earnest money back.

Potential Downsides To A Kick-Out Clause

• Puts your contingencies at risk: Contingencies provide extra protections for buyers who need to sell their current home or who are worried about the appraisal or inspection report. A kick-out clause could force you to remove the contingencies that were there to protect you.
• Could lose out on the home: If you aren’t comfortable removing your contingencies if a seller receives a competing noncontingent offer, then you could end up having to walk away from the deal altogether, meaning you’re starting your home search over again.
• Not always accepted: Not all sellers will accept a contingent offer, even with a kick-out clause included. This is especially the base if you’re trying to buy in a seller’s market.

Kick-Out Clause Listings: Bid Or Bail?

As a buyer, you might find yourself falling in love with a home that already has an active contract but that includes a kick-out clause. In that case, should you make an offer?

There are definitely downsides to making an offer on a home with an active contract and a kick-out clause. First, this type of clause offers the original buyer the right of first refusal. When you make your offer, the original buyer will have 48 or 72 hours to adjust their offer. If they agree to remove their contingencies, your offer will be declined. Not only do you have to wait longer to find out if your offer was accepted, but it’s entirely up to the original buyer – not the seller – whether your offer will be accepted at all.

Another downside of making an offer on a home with an accepted offer with a kick-out clause is that, for your offer to be accepted, you’ll have to make a noncontingent offer.

For example, suppose the original offer on the home includes a home sale contingency and a kick-out clause. Ideally, the seller wants an offer without this contingency, which is why they included the clause in the first place. For your offer to be considered, it can’t include a home sale contingency.

Of course, that’s not to say you shouldn’t make an offer on a home with an accepted offer and a kick-out clause. The worst that can happen is that you don’t get the home. If you love the house, go ahead and make your offer, but know the risks and continue searching for another home, at least until you hear whether your offer has been accepted.

The Bottom Line: Kick-Out Clauses Help Buyers And Sellers Alike

A kick-out clause is designed to protect a seller, giving them other options to sell their home in case a buyer makes a contingent offer. In addition to the clear benefits for sellers, they also benefit buyers by making it easier for them to have their contingent offers accepted and by allowing them to recover their earnest money if another noncontingent offer comes through.

If you’re buying a home and the seller wants to include a kick-out clause, you’ll have to weigh the pros and cons to decide whether that works for you. In the meantime, as you’re preparing to start your home search, apply for a mortgage today so you’re ready to make an offer when you find the perfect home.