Everything you need to know about kick out clauses

A kick out clause, also known as an active kick out, is a unique contingency that can help home sellers get the best offer while making it easier for buyers to get their contingent offer accepted. However, a kick out clause comes with drawbacks for buyers and sellers alike. Understand the nuance of this unique provision before including one in your purchase agreement.

What is a kick out clause in real estate? 

A kick out clause is a contractual provision that allows sellers to keep showing their home to prospective buyers — even after they’ve accepted a buyer’s contingent offer. In transactions that don’t include a kick out clause, the seller must take the home off the market after accepting the buyer’s offer — contingent or not.

Kick out clauses are most commonly used when a buyer submits an offer with a home sale contingency — a provision which allows a buyer to walk away from a home purchase if they’re unable to sell their own home. This can be a hard stipulation for sellers to swallow because it comes with the risk of their own home sale falling through. However, a kick out clause sweetens the deal by allowing sellers to solicit and accept better offers while they go through the closing process.

How does an active kick out work?

Kick out clauses can come into play when a seller accepts a contingent offer, but wants to keep looking for buyers that are willing to make a better offer. If a new buyer swoops in offering a higher sale price, no contingencies, or both, the seller can “kick out” the original buyer and accept the new offer.

If a seller wants to switch buyers, they have to notify the original buyer with the contingent contract. The original buyer has to decide if they want to proceed with purchasing the home even without the contingency in place. Generally, home sellers give the buyer 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.

Here’s a closer look at the active kick out process for those considering using this clause:

1. Add the kick out clause to the purchase contract

Let's say the buyers makes an offer that includes a home sale contingency. (The contingency period can last anywhere from 30 to 90 days and is influenced by current market conditions.) Sellers can add an active kickout to the contract so they still show their house during this time period.

2. Enact the clause if you get a second offer

Sellers who receive another offer and want to enact the kick out clause, need to give the original buyer 72 hours to remove their contingency and match the new offer. For example, if 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

If you're buying a house you can also choose to walk away from the sale at this point and get your earnest money deposit back. You can also choose to make a new offer without contingencies, and if the seller accepts, you have to continue with the purchase. You'll typically need to close on the home within 45 days. This can lead to the buyer 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. 

What sellers need to know about kick out clauses

Sellers who aren’t satisfied with the contingent offer on their home can get the best of both worlds by including a kick out clause in the purchase agreement. By still 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. 

→ Learn how to craft a winning counter offer

What buyers need to know about kick out clauses

While a kick out clause may seem like a bad option for buyers, you might need to make this compromise in order for sellers to accept your offer.

Sellers may be more willing to accept a contingent offer if they have the flexibility to pursue better, non-contingent offers. Buyers can use this time to secure a buyer for their home or secure the cash needed to make a non-contingent offer. It may add some uncertainty for buyers, but it can give buyers the edge they need to get their offer accepted.

→ Here's how to make an offer on a house

The disadvantages 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, too. Buyers and sellers who include a kick out clause should look out for the following:

Risks for sellers

• Reduced buyer interest: 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. 
• Risk of losing both buyers: 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, defeating the purpose of including the clause.

Risks for buyers

• Get kicked out: The main risk for buyers is that a second offer could comes through the seller kicks them out. This could leave them without a new home to move into if they’re ready to accept an on offer on their own home. This is why it’s important that buyers include “right of first refusal” language in their contract so that they do have the option of matching the new offer if their price is better. 
• End up owning two homes at once: Buyers may be able to match the better offer on the home, but if their home hasn’t sold yet or the deal falls through, they can end up with two homes — and two mortgages — at once.

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 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 make a larger earnest money deposit. 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 provide. 

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 working with Orchard. Orchard helps buyers sell their existing home on their schedule, by guaranteeing their home sale and transforming them into non-contingent buyers.

→ Learn more about how Orchard works