Kick Out Clause: Does It Help or Hurt The Buyer?
What Is a Kick Out Clause?
Selling or buying a home has traditionally been all about perfect timing. Buyers typically must sell their existing home first in order to obtain the funds to purchase their next home. Many buyers prefer to find their new home before they sell their existing one so they don’t have to move twice. So, what do you do if you’re a buyer and find your dream house but haven’t sold your existing one? You typically go ahead and make an offer on your dream home, but you include a home sale contingency or a “kick-out clause.”
A home sale contingency is part of a buyer’s offer that says they will purchase the home only if they sell their existing home first. There’s a problem with this contingency, however. It asks the seller to take their home off the market and wait…wait for you to hopefully sell your home quickly. The period of time to sell a home typically ranges anywhere from 30 to 90 days. If you can’t sell your house in this timeframe, you have the right to cancel your offer and receive your earnest money back.
What’s in it for the seller? Not much. They lose that earnest money and have to relist their home, going back to square one. They’ve lost all of that time waiting on you. Because an offer with a home sale contingency offers little advantage to the seller, many decline these offers. But there’s a way to make them a bit more appealing to the seller – by allowing the seller to include a “kick-out” clause.
The kick-out clause simply states that the seller is able to continue marketing their home during this “contingent” period. You still have your offer on the table, but if the seller receives a non-contingent offer they want to take, they can inform you of the new offer and you must make a decision within 72 hours (or whatever time period was agreed upon). You have two options:
- You can cancel your contract, receive back your earnest money deposit, and free the seller to accept the non-contingent offer.
- You can proceed with the purchase of the home but must remove the home sale contingency. This means you must come up with the financing to secure the new home, providing evidence that you have done so.
The Benefits and Disadvantages of a Kick-Out Clause
There are pros and cons with a kick-out clause for both you and the seller. Keep in mind, however, a non-contingent offer without a kick-out clause will still be more attractive to the seller. The less friction in the home sale transaction, the better. Sellers simply want to sell their home. The more strings attached, the more likely they will want to look at other offers. But, depending on many variables, such as the current housing market, how much time they are willing to wait to sell, how long their home has been on the market, and how many reasonable offers they’ve received, accepting an offer with a home sale contingency and a kick-out clause may be their best option.
For the Seller
So, why would the seller want to include a kick-out clause in their offer? Obviously, it lowers the seller’s risk and gives them more flexibility. If a seller has your offer and another on the table, both of which have a home sale contingency, your kick-out clause automatically makes your offer more attractive. It gives the seller wiggle room. Your offer may end up being the best one at the end of the day, but the seller also has the ability to keep their home on the market in case something better comes along.
On the other hand, a kick-out clause still has some risk for the seller. If they receive an attractive, non-contingent offer, they may have to wait up to a week before you are released from your contract. The new buyer may not be willing to wait that long or they may find another home that isn’t already under contract.
For the Buyer
The kick-out clause is beneficial to a buyer because it allows you to find a home before you sell your existing one. You can’t take long, however. Once you make your contingent offer with a kick-out clause, the clock begins to tick. You must sell your home within the allotted timeframe or risk losing the home to another buyer. Basically, the kick-out clause gives you a little breathing room.
The kick-out clause may buy you time to sell before you buy, but it’s not without its stress, either. Thankfully, you still have another option, one that guarantees a smoother, calmer home buying experience.
How to Avoid a Kick-Out Clause
The kick-out clause clearly has its benefits. It softens a home sale-contingent offer to make it more appealing to a seller. But even with the amendment, you’re still at a disadvantage if a non-contingent offer comes in. The only way to level the playing field is to make a non-contingent offer.
There are several contingencies that can be added to a home sale contract, and in fact, 76% of contracts have some sort of contingency. The home sale contingency is common, but there is also the financing contingency, the appraisal contingency, the inspection contingency, and the title contingency. Most sellers are used to receiving offers with at least a couple of these contingencies included, but if you can remove as many as possible, you will strengthen your offer. You’ll also reduce the time it takes to finally get the house you want.
It’s never a good idea to remove the inspection or title contingencies. The inspection contingency makes your contract dependent on the condition of the home, as inspected by an independent third party. If the inspector finds damage or failures that the seller is unwilling to fix or if the seller is unwilling to reduce the sales price to allow for repairs, you don’t want to be stuck buying the house. You need to know what you’re getting into and have the option to cancel your contract if you and the seller can’t come to an agreement.
The title contingency is also common and protects you from purchasing a home that has issues with its record of ownership. Typically, the types of issues the title company may find are that a previous lien was never settled or property taxes weren’t paid. If this happens to you, you have the right to back out of your contract and receive your earnest money back. Fortunately, most title issues are easy to resolve and, therefore, don’t result in you losing the house.
It’s more common for buyers to remove the home sale contingency, the financing contingency, and the appraisal contingency by making an all-cash offer. All-cash offers are beneficial to both you and the seller. Here’s why:
The Buyer
For you, an all-cash offer means you will almost always beat out an offer with multiple contingencies. Even if you give the seller the kick-out clause option because you haven’t sold your existing home first, there’s a risk they will get a better offer. You can also expect to save up to 5% on the sales price with a cash offer, because it’s more attractive to the seller. You don’t have to wait long to close, either. Because your contract isn’t dependent on a lender approving you or appraising the new home, you can close much faster.
The Seller
All-cash offers are the ones that get a seller’s attention. They know all-cash offers have less risk of falling through, are more reliable, and close faster than any other offer. They can stop showing their home, start packing, and move out in days versus months.
How to Secure Cash to Make an All-Cash Offer
If you don’t already have access to enough cash to make an all-cash offer, consider working with Homeward. Our company is changing how real estate is bought and sold. To get started, all you have to do is go through a brief online application process. Once approved, we will assess the value of your existing home and confirm your home equity.
You can use our cash to make an all-cash offer, without a home sale, financing, or appraisal contingency – or a kick-out clause. You pay us 1.9% for this capability, then rent your new home from us until your existing home sells. Once it does, you close on your new home and take over with your new mortgage. If your old home doesn’t sell in six months, we’ll buy it from you at a pre-agreed floor price.
This is the best way to remove all of the stress that comes with traditional home buying. No more playing the frustrating timing game. Instead, you get the home you really want when you want it. You don’t have to sell first or place contingencies and a kick-out clause to buy you time. The home is yours because you bought it with cash. Doesn’t get any easier than that.
