Are you planning to sell your home, but your buyer isn’t ready to sign the agreement? While timing is everything when selling or buying a home, several home purchase contracts have contingency clauses, which may delay the sale.
One of these contingencies is known as a kick-out clause. While a kick-out clause in real estate can be a great idea, there are several considerations that the buyer and seller should make before considering it.
Here is what you need to know about this contingency clause and if it is the right option for you.
What is a kick out clause and how does it work?
Also referred to as a bump-out clause, this type of contingency in home purchase contracts allows a home seller to continue showing their home even after a buyer has made an offer.
The clause also allows the seller to handle multiple offers and reject the first offer in favor of another offer from a different buyer, with a contingency. A kick-out clause is standard in cases where a buyer wishes to buy a new home but also needs to sell their current home to get the finances they need to buy the new house.
A kick-out clause can be beneficial to both the buyer and the seller. Suppose the clause is included in a purchase contract. The seller doesn’t have to take their property off the market.
How a kick-out clause works
If a kick-out clause is included in the purchase contract, the seller has to notify the first buyer if they get a better or a non-contingency buyer. The first buyer can then decide if they want to complete the purchase or walk away from it.
Property buyers have at least 72 hours to decide whether or not they will buy the property. This ensures the seller doesn’t lose the second offer and gives the buyer time to weigh their options or get the money they need.
If a buyer walks away from the sale, any money they had paid or the buyer’s earnest money is returned to them. The seller is then free to enter into a new purchase contract. However, if the first buyer agrees to purchase the home without the clause, they must close within 45 days.
Here’s a kick-out clause example. Let’s say a buyer makes an offer and only has $ 160,000 that they can put down. Later, another buyer puts down $190,000 the seller can choose to accept the second offer.
However, they will have to inform the first buyer and give them 72 hours to make a better offer or walk away from the sale.
When buyers make a contingent offer within a kick-out clause, they must sell their home within a specific period. This is especially important in competitive markets. Failing to sell a house quickly also means losing a new home to another buyer.
This clause is common in buyer’s markets because no home seller wants to remain stuck in a drawn-out home sale.
Why sellers accept offers with kick-out clause
There are several reasons why home sellers accept such offers from a buyer. First, if the real estate market is good, a seller can accept the offer as they wait for the buyer to sell their current home. This is because the house is likely to sell quickly.
Other aspects, such as an extra-large earnest money deposit or the buyer’s offer, which can be above the asking price, can encourage a seller to wait for the buyer to buy the home under the contingency clause.
Sellers who aren’t in a rush to sell their property can also choose to take a contingent offer. Kick-out clauses protect sellers from re-listing their home if a sale doesn’t fall through and the risks of a cooling housing market.
The clause gives home sellers some flexibility, protects, and gives buyers time to sell their homes and have money to buy a new home. Several buyers prefer having a kick-out clause because it is better than an outright rejection of an offer.
Pros of a kick-out clause for sellers
Since a kick-out clause allows sellers to accept an offer on their home and keep their options open, a seller will likely get a better offer from another buyer. Your real estate agent will continue to market and show your home to any other potential buyer without any financial or legal risks.
If a seller gets another offer, the first buyer may have to eliminate the contingencies, which will also speed up the sale. Kick-out clauses in real estate contracts motivate buyers to sell their current homes quickly and buy new ones before the seller gets a better offer.
A seller can entertain another offer with one in their back pocket, which is a good incentive because they can get a higher offer. Since the home will also show as “contingent with kick out” in the Multiple Listing Services (MLS), other buyers will know that it is on demand and want to make a quick and better offer.
If a seller gets a better offer, they can ask the first buyer to match the second offer to preserve the deal.
Pros of a kick-out clause for buyers
A kick-out clause in real estate has some benefits for buyers. Without a kick-out clause, a seller can refuse a buyer’s offer up-front, especially if they don’t have the down payment. The clause allows buyers to sell their home with a promise of a new home as soon as they sell their old one.
The buyer will know how much they need to make to buy the new home, guiding them on how to price their home. Depending on the real estate market in their location, they will know what to expect and how to prepare for the sale and subsequent purchase.
The clause also gives the buyer peace of mind or protection in knowing that they already have a home to buy.
Cons of a kick-out clause for sellers and buyers
Kick-out clauses have several advantages to offer. However, there are also some risks involved.
It is vital to define how much time a first buyer has to decide on what to do when a seller gets a second offer. For example, suppose the seller receives a second offer on a holiday or weekend. In that case, the buyer may not be able to decide within 72 hours, as stated in the contingency purchase contract.
Buyers use this time to talk to lenders, banks, and other financiers to know if they can get a second mortgage or money to close the sale. Since such organizations don’t operate over the weekends or holidays, a buyer may not be able to respond in good time.
Since other buyers may be ready to close a sale on a holiday or weekend, the seller or second may not be willing to wait for several days. Therefore, it is crucial to be more specific with the time limits, especially during weekends, holidays, and the close of business days.
Kick-out clauses can be very challenging to draft. To get the best out of your kick-out clause, you need to work with a real estate agent who is familiar with such contingencies and knows the correct language to use while drafting the purchase agreement.
It is vital that both the seller and buyer read the purchase contract and understand the contingency included before signing it.
If a seller gets a second offer and the first buyer agrees to close the sale without contingencies even before selling their home, the closing process may not be as smooth.
Sometimes, the buyer may not have enough money to cover their current and new home mortgages. They may not be able to get the financing they need, which may cause several financial issues.
If the buyer fails to get the financing they need to close the deal, the seller may have to retain the buyer’s earnest money as compensation. The buyer will still have to re-list their home, which has some financial implications.
To protect the buyer from losing money and avoid any other financial issues, it may be best for sellers or real estate agents to ask the contingent buyer to show proof that they can get financing before they remove a home from a contingency contract.
This could be a pre-approval letter showing they can afford to pay two mortgages. If you want to buy a home with a kick-out clause, talk to your agent and learn about second home mortgages or home equity loans.
Consider a kick-out clause house when buying or selling a home
A kick-out clause can help home buyers put in an offer while also waiting to sell their current home. The clause gives buyers time to get financing and protects sellers from being stuck with an offer that can fall through.
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