What Is A Kick Out Clause?

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A kick out clause, also known as an active kick out, is a unique type of contingency that can help home sellers get the best offer, while making it easier for buyers to get a contingency accepted. Let’s take a closer look at what a kick-out clause is, how it works, and what both buyers and sellers should be aware of when using one. 

What is a kick out clause? 

Kick out clauses allow the home seller to keep showing their home to prospective buyers even after they’ve accepted a contingent offer. A contingency is a clause included in a home buying contract that makes it so the home sale  goes through only if certain conditions are met. Contingencies give buyers the upper hand, as when they have one, they can back out of the sale without losing the earnest money deposit they put down on the home. 

Where a kick out clause comes into play is when a seller accepts a contingent offer, but wants to keep looking for other buyers that are willing to make a non-contingent offer. Also, the seller can hold out for a higher offer. If a new buyer swoops in offering a higher sale price and doesn’t have any contingencies, the seller can “kick out” the original buyer so they can go ahead and accept the new offer. 

If a seller receives a better offer and wants to switch buyers, they have to notify the original buyer with the contingent contract. Then, the original buyer has to decide if they want to proceed with purchasing the home even without the contingency in place. Generally, sellers give buyers around 72 hours to make this decision. If the original buyer chooses to walk away, they will get their earnest money deposit back and the seller can then enter into a contract with their newly found buyer. 

What sellers need to know about kick out clauses

Sellers can benefit greatly from kick out clauses if they aren’t happy with having a contingent offer on their home. By being able to keep showing their home to potential buyers, they may be able to get  a better offer — but in the meantime, they’ll have started the selling process with the original buyer. While not all buyers will agree to a kick out clause, some may find this to be a better option than having their offer flat out rejected. 

Sellers only have a limited amount of time to look for a new offer. For example, if the buyer has a contingency that they must sell their existing home before buying this one, once they sell their home (if within the contingency time frame) the kick out clause ends. If this happens, the seller is no longer allowed to market their home to new buyers. 

What buyers need to know about kick out clauses

While kick out clauses seem like a bad option for buyers at first glance, they don’t hurt the buyer financially. In reality, a kick out clause could be the trick buyers need up their sleeves to make sellers feel comfortable taking their contingent offer. 

It’s more common to see a kick out clause happen in a buyer’s market as that’s when home sellers worry about going through a long home sale process. This is something the buyer can appreciate, as the reason they’re likely asking for a contingency is because they’re afraid their home won’t sell quickly. 

In a seller’s market, kick out clauses are very uncommon, mostly because sellers are less likely to accept an offer with a contingency during a competitive housing market. 

What the kick out clause process looks like

Whether you’re looking to buy or sell a home, it can be helpful to understand what the kick out clause process looks like. 

1. Add the kick out clause to the contract. If a buyer wants to make a contingent offer, they’ll need to request that the seller include a home sale contingency period in their contract. This period can last anywhere from 30 to 90 days and is influenced by current market conditions. Sellers can still show their house during this time period if they add a kick out clause to the contract.

2. Enacting the clause if you get a second offer. If the seller does in fact get another offer and wants to enact the kick out clause, they’ll need to give the original buyer 72 hours to remove their contingency and match the new offer. Let’s say the original offer was for $500,000 with a contingency, but the new buyer offers $550,000 with no contingency — the original buyer would have to match that offer or make a better one. 

3. The buyer can walk away or stay.The buyer can also choose to walk away from the sale at this point and they will get their earnest money deposit back. If the original buyer chooses to make a new offer that removes their contingency, and the buyer accepts, they have to continue with the purchase and will typically need to close on the home within 45 days. This can lead to them owning two homes if they can’t sell their original home in time.

4. Enter into a new contract or stick with the original buyer. If the original buyer walks away, the seller can then enter into a new home sale contract with the second buyer. 

The downsides of kick out clauses

While there are some pretty big benefits to kick out clauses, especially for sellers who are uneasy about accepting a contingent offer, there can be some downsides associated with kick out clauses. Let’s examine the intricacies of kick out clauses that both sellers and buyers should look out for.  

Downsides for sellers

While sellers do still have the option of advertising their home for sale, homes actively marketed with a kick out clause may not attract as many buyers. When buyers see a home is currently contingent with a kick out clause, that signals to them that they’ll need to move quickly and will have to make a competitive offer to get the home. 

Sellers also risk the chance of kicking out the original buyer and the new offer falling through. If this were to happen, they would need to start the process of trying to find a buyer over again. Obviously, that’s not ideal. 

Downsides for buyers

The main risk for buyers is that a second offer could come through and they can find themselves in a few different tricky situations. They can match the better offer on the home, but if their home hasn’t sold yet that can be stressful, as owning two homes isn’t always feasible. They can also make solid progress on the home selling process and find themselves with offers right after the seller kicks them out, leaving them without a new home to move into. 

It’s important that buyers include “right of first refusal” language in their contract so that way they do have the option of matching the new offer if their price is better. 

Is a kick out clause required? 

Sellers don’t need to include a kick out clause if they don’t want to. There are plenty of things that buyers can do to make their offer super competitive and dealing with a contingent offer can be worth it to sellers under certain circumstances. For example, a buyer can offer more than the asking price, or may have a large earnest money deposit available. If a seller isn’t in a rush to sell their home and wouldn’t mind having a bit of extra time to look for their next home, they might even appreciate the cushion a contingent offer can buy them. 

There are plenty of sellers who don’t want to scare off a prospective buyer with a kick out clause if their offer checks off all of their other boxes. 

How can you avoid a kick out clause? 

Kick out clauses aren’t for everybody. Buyers that want to avoid a kick out clause often need some extra help juggling selling their home and buying one at the same time — especially when buying in a competitive seller’s market. One option for making that process easier is Orchard. Orchard helps buyers sell their existing home on their schedule, by giving them up to 90% of their home value upfront to put toward their new home purchase. With their instant equity, buyers can become non-contingent buyers and make a competitive offer on their new dream home. 

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With Orchard, secure your dream home before you list. Avoid home showings, double mortgages, and double moves.

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