How Does A Real Estate Kick Out Clause Work?

The PropertyClub Team
Aug 15th 2020
If you are planning on buying a house and making a contingent offer, chances are you’ve run into talk of a kick-out clause. So what does this real estate term mean, and how does it work?

When it comes to real estate terminology, there are a couple of phrases that make most people wince. The word eviction, for example, would make most renters jump. The term kick-out clause sounds pretty frightening, too. Unlike evictions, though, these clauses can be somewhat beneficial when you’re trying to buy or sell a home. 

What Is A Real Estate Kick-Out Clause?

A kick-out clause is a common provision in real estate purchase contracts that involve contingencies. Essentially, they let the seller to continue showing the home and accept a non-contingent offer. They’re most commonly used in situations where the buyers need to sell their current home before the closing. 

As you likely know, when you first shop for a home, you are allowed to make an offer based on certain contingencies. A very common contingency is that a buyer will close on the home within a specific time frame, as long as they can sell their house first. Generally speaking, the buyer will ask the seller to take the home off the market for a period of 30, 60, or 90 days. 

If the buyer sells their house and closes on the deal, all is well. But if the buyer doesn’t sell their home and the sale falls through, the seller is left without interested buyers. Here’s where the kick-out clause comes into play. A kick-out clause means that the seller retains the right to show the house to other interested buyers. If another buyer chooses to make an offer on the house without a contingency attached to the new offer, the seller has the ability to “kick out” the initial buyer if they are unwilling to remove the contingency. Typically, the kick-out clause will give the initial buyer 48 or 72 hours to remove their contingency or walk away. 

Kick-Out Clause Example

Let’s say that you have a house that you’ve put on the market, and you have a kick-out clause in any offer that you accept. You have a buyer who wants to buy your home but is open to a kick-out clause that involves a 60-day contingency. You accept the offer, but keep showing your house just in case. 

Your buyer was in the process of selling their house when you get another offer from a different buyer. Here’s what will end up happening:

  1. You will need to notify the other seller about the offer. This has to be done in writing, and it needs to be received quickly. They are given 72 hours to decide how to proceed.
  2. The first buyer has to figure out whether they want to continue to buy the house without them selling their home. They will need to give you a response in writing, determining their decision. 
  3. If the first buyer cannot buy the first house, the seller can kick the first buyer out of the deal. The seller will then notify the second buyer that they can proceed with the sale. 
  4. If the first buyer agrees to buy the house, the sale pulls through. This means you will need to go without a contingency, and that the buyer has to find funding to get the house. In most cases, the sale will then close around 45 days after the agreement has been reached. 

How Does A Kick-Out Clause Protect Sellers?

As you can see, this is a definite win for the seller of the house. They get to shorten the amount of time their home is on the market, which makes it easier for them to get the transaction done. It also protects them from being cheated out of potentially good buyers. 

Sellers will have the best chance of getting their house off the market and sold using a kick-out clause. It’s a way to hedge one’s bets in an increasingly uncertain market. 

How Does A Kick-Out Clause Protect Buyers?

The benefits of having a kick-out clause are pretty evident for sellers, but the perks aren’t so clear when it comes to buyers. However, they’re definitely there. The biggest perk of a kick-out clause is that buyers get the ability to have time to sell their homes, which makes the transition easier. 

If they can’t sell their home in time, they’re not going to be on the hook for that funding. They can just cancel the sale and get their earnest money returned until they are able to sell off the home they have. 

Do You Need A Kick-Out Clause?

A kick-out clause will never be mandatory when it comes to a home purchase or sale offer. That’s just not the way that things go in real estate. However, most buyers and sellers feel more comfortable by including it in offers and counteroffers they give out. 

If you’re unsure whether a kick-out clause is right for you, consider the following signs that suggest you should add it to your offer:

  • You are not entirely sure that your home will sell by the time you are slated to close on the house you’re purchasing. This is the main issue that makes most buyers insist on a kick-out clause. 
  • If the sale falls through, you need that earnest money back. A kick-out clause can protect your earnest money in situations where you can’t close in time. This gives you a refund when most other situations won’t allow for it. 
  • You’re open to letting the seller show the house to others. If you are not comfortable with this, a kick-out clause is not right for you. 
  • You feel like you need a little extra “breathing room” for all the transactions you need to do. Let’s face it. Selling your home is a major ordeal. So is buying a new one. If you’re a buyer in this situation, you might need extra time to make sure that everything goes well. 
  • You aren’t sure you will be able to get a bridge loan. Bridge loans are made to cover issues where you can’t sell your old home but need to buy a new one. If you aren’t sure you can qualify for one, then you probably need a kick-out clause.
  • You spoke with your real estate agent, and they strongly suggested it. More often than not, talking to a real estate agent is the best way to determine your best move. After all, they’re the experts.