Every real estate transaction involves risk, regardless of whether you are a buyer or a seller. And during a real estate transaction, each party can include certain contingent liabilities to mitigate some of the risks. Joint contingent liabilities can allow either party to withdraw from the contract if certain conditions are not met, such as:
- A satisfactory one Home inspection
- A home valuation that meets the lender’s requirements
- Final approval of the buyer Home loan
If you are thinking about a home or are in the process of selling it, another option worth adding is called the kick-out clause.
What is a kick-out clause?
A kick-out clause allows you to market your home to other potential buyers even after accepting an offer from another buyer. Typically this clause is added when the buyer has yet to sell their current home in order to buy your home. The kick-out clause enables you to cancel the offer from the first buyer in the event that another, more preferred offer is received from a second buyer.
It may seem like a tough clause to get involved in a real estate transaction, but it can help protect both buyers and sellers. A kick-out clause can be particularly helpful in the market of a seller with a small inventory of housing and high buyer demand.
How does a kick-out clause affect the buyer?
From the buyer’s point of view, this clause has both good and bad aspects.
The good: The kick-out clause prevents a buyer from having two mortgages as they must first sell their first home before buying another. This can also help the buyer reconsider if they can afford the new home or when the new mortgage can be a stretch without a substantial down payment.
The bad: A buyer could lose the desired home with a better offer to another buyer while they wait to sell their current home. In a hot real estate market, sellers may not want to accept contingent liabilities with a kick-out clause.
How does a kick-out clause affect the seller?
From the seller’s point of view, a kick-out clause offers both good and bad points.
The good: The seller can continue to actively market their home and look for a better deal. If a second offer is received, the seller also maintains a strong negotiating position since an offer is already in place
The bad: If the home seller uses the kick-out clause and follows an offer from another buyer, there is a risk that the buyer will withdraw or the deal will fail. The seller would have to re-list the house, which can be time consuming and further delay their ability to move into their next home.
Why should a seller use a kick-out clause?
Real estate markets may give preference to the seller when there is currently little inventory available locally Housing markets and there are many buyers. It can also benefit the buyer when there is a large housing stock and few buyers. The kick-out clause applies to both the buyer’s and seller’s market.
In a seller’s market, many buyers compete for available homes. A kick-out clause ensures that the seller is not stuck in a lengthy home sale in a buyer’s market. It prevents the buyer from having to take out two mortgages if they have trouble selling their home.
How would a seller exercise a kick-out clause?
The seller must inform the first buyer in writing that he has a cheaper offer and invokes the kick-out clause. This document usually gives the buyer a set time frame (usually 72 hours) to make a decision.
The buyer has two options:
- Remove the kick-out clause from their contract and buy the property no matter what.
- Agree to be excluded from the deal and lose the house. If the buyer agrees to be “kicked out”, they will often get their money back.
This is how you avoid a kick-out clause
As a shopper, it can be heartbreaking to find the home of your dreams only to take out from among you. To avoid the pain and loss of time invested in the business, a buyer can take steps to avoid the need for a kick-out clause.
- As a buyer, you can first sell your home and move into temporary accommodation, either monthly rent or other short-term accommodation. You are already in a good position to get a bid on the next house without the need for a kick-out clause. Yes, it takes an extra step, but you won’t get bumped into buying a home that you love.
- If you need the equity of your current home to buy your new home, workarounds are available. You can work with a third party lender to provide bridge finance for the underwriting of your next home. When your first home is sold, you can repay the money.
The problem with a kick-out clause
The main problem with a kick-out clause occurs with a Seller market. An offer with a kick-out clause will usually appear at the end of the stack of other offers. If a seller receives several competitive offers, it is unlikely that an offer from a buyer with such a clause will be considered.
The kick-out clause can protect both the buyer and the seller from entering into a real estate deal that is not beneficial to either party. Depending on how long it can take to sell the buyer’s current home or the likelihood that the seller will receive multiple offers without a kick-out clause, both buyers and sellers need to think twice before proceeding with a transaction . Contact your real estate attorney or Real estate agent If you have any questions before deciding whether to use a kick-out clause.