What is a Real Estate Kick-Out Clause? Your Expert Guide

A real estate kick-out clause is a stipulation within a real estate contract that allows the seller to continue marketing their property, even after accepting an offer from a buyer who needs to sell their current home to finance the purchase. If the seller receives a better offer, they can “kick out” the original buyer, provided the original buyer cannot or chooses not to remove their contingency within a specified timeframe. It’s a safety net for sellers in situations where a buyer’s offer hinges on the successful sale of another property. This contingency creates uncertainty for the seller, and the kick-out clause is designed to mitigate that risk.

Unpacking the Mechanics of a Kick-Out Clause

At its heart, the kick-out clause acknowledges the inherent risk associated with a contingent offer. These offers, often made by buyers who need to sell their existing property before securing financing, can tie up a seller’s home for an extended period. During this time, the seller can’t freely entertain other offers.

The kick-out clause gives the seller the option to keep their home on the market. If another, more favorable offer surfaces (usually a non-contingent offer or one with a higher price), the seller must then give the original buyer a written notice to remove the contingency.

The Notice Period: A Critical Element

The notice period is a key component. This period, typically ranging from 24 to 72 hours (negotiable, of course!), gives the original buyer the opportunity to decide whether to proceed with the purchase regardless of the sale of their existing home. They can either:

• Waive the contingency: This means the buyer commits to purchasing the property, even if they haven’t sold their own home. They’ll need to secure financing through other means or have sufficient cash reserves.
• Decline to waive the contingency: In this case, the original contract is terminated, and the seller is free to accept the new offer. The original buyer usually gets their earnest money deposit back.

Seller Advantages & Buyer Risks

For the seller, the kick-out clause provides a degree of security. They avoid being held hostage by a contingent offer that might never materialize. They retain the ability to capitalize on market demand and potentially secure a better deal.

For the buyer, the kick-out clause introduces uncertainty. They risk losing the property if a better offer comes along. It also puts pressure on them to sell their existing home quickly or find alternative financing solutions.

Key Considerations When Negotiating a Kick-Out Clause

Both buyers and sellers should carefully consider the following points when negotiating a kick-out clause:

• Specifics of the trigger: Clearly define what constitutes a “better offer.” Is it solely based on price, or does it include other factors like closing date, financing terms, and included contingencies?
• Notice period length: This is a crucial point of negotiation. A shorter notice period puts more pressure on the buyer, while a longer period gives them more time to secure financing.
• Earnest money protection: Ensure the buyer’s earnest money is protected if the contract is terminated due to the kick-out clause.
• Seller’s continued marketing obligations: Clarify whether the seller is obligated to actively market the property or simply allowed to accept offers that come their way.
• Good faith: Both parties should act in good faith. The seller shouldn’t use the kick-out clause to merely solicit higher offers and the buyer should seriously work toward selling their current home.

Frequently Asked Questions (FAQs)

1. Is a kick-out clause always in the seller’s favor?

While the kick-out clause primarily benefits the seller by providing a safety net, it isn’t automatically always in their favor. A poorly worded clause can create ambiguity and lead to legal disputes. Moreover, some buyers might be hesitant to make an offer on a property with a kick-out clause, potentially reducing the pool of interested parties. The seller needs to carefully consider the market and the strength of the initial offer before insisting on a kick-out.

2. What happens if the original buyer can’t get financing after waiving the contingency?

If the original buyer waives the contingency but ultimately fails to secure financing, they will likely be in breach of contract. This could result in the seller keeping the earnest money deposit as compensation. It is crucial for the buyer to be absolutely certain about their ability to secure financing before waiving the contingency.

3. Can a buyer include a kick-out clause in their offer?

Generally, kick-out clauses are designed to protect the seller. It’s uncommon, but not entirely impossible, for a buyer to propose a clause that allows them to back out if they find a better property before closing. However, this is a far less common scenario.

4. What is the difference between a kick-out clause and a first right of refusal?

A first right of refusal gives a specific party the first opportunity to purchase a property if the seller decides to sell. In contrast, a kick-out clause deals with a situation where an offer has already been accepted, but the seller retains the right to continue marketing the property.

5. How common are kick-out clauses?

Kick-out clauses are more common in buyer’s markets or situations where there are a lot of properties for sale and fewer buyers. In a seller’s market, where demand is high, sellers may not need to include this type of clause as they’re more likely to receive non-contingent offers.

6. What constitutes a “better offer” in a kick-out clause?

The definition of a “better offer” should be explicitly defined in the clause. It typically includes a higher purchase price, but can also encompass factors like a faster closing date, fewer contingencies, or an all-cash offer. It’s crucial to be specific to avoid misunderstandings.

7. What happens to the buyer’s earnest money if the kick-out clause is triggered?

Typically, the buyer’s earnest money is returned to them if the contract is terminated due to the kick-out clause, provided they haven’t breached any other terms of the contract. The specific wording of the clause should address this point clearly.

8. Can a seller use a kick-out clause to get a higher price from the original buyer?

While technically the seller can present the “better offer” to the original buyer and encourage them to increase their offer, using the kick-out clause solely to manipulate the price is generally considered unethical and could potentially lead to legal issues if it’s deemed as acting in bad faith.

9. Should I consult with a real estate attorney before agreeing to a kick-out clause?

Absolutely. Consulting with a real estate attorney is highly recommended, whether you’re a buyer or a seller. An attorney can review the clause to ensure it’s fair, enforceable, and protects your interests.

10. What are the tax implications of using a kick-out clause?

The kick-out clause itself doesn’t typically have direct tax implications. However, the sale of a property does. Both buyers and sellers should consult with a tax professional to understand the tax consequences of a real estate transaction, regardless of whether a kick-out clause is involved.

11. How does a kick-out clause affect the appraisal process?

The kick-out clause doesn’t directly affect the appraisal process. The appraisal will still be conducted to determine the fair market value of the property, regardless of whether there’s a contingency in place or a kick-out clause. The appraised value might, however, influence the buyer’s decision on whether to waive the contingency.

12. Are there alternatives to a kick-out clause?

Yes, several alternatives exist, depending on the specific circumstances. These include:

• Bridge Loans: Buyers can secure a short-term bridge loan to finance the purchase of the new property before selling their existing home.
• Rent-Back Agreements: The seller can agree to rent the property back from the buyer after closing, providing them with more time to find a new home.
• Short-Term Rentals: Buyers can arrange for short-term rentals to give themselves time to sell their home without the pressure of the kick-out clause.
• Price Reduction with a Guarantee: The seller can agree to a reduced price, but with a guarantee that the buyer will sell their home within a specific timeframe. If the buyer fails, they may forfeit a portion of the deposit.

By understanding the nuances of a real estate kick-out clause and carefully considering your options, you can navigate the complexities of buying or selling a home with confidence. Remember to always seek professional advice from a qualified real estate agent and attorney to protect your interests.