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What is a Kick-Out Clause, and How Can You Avoid It?

The UpEquity Team Sep 17, 2021

A kick-out clause is part of a home sale contingency. In this contingency, you’re given time to sell your house to enable you to pay for the new house. But if you’re unable to sell your home within the agreed time, the seller would have to:

  • Terminate the contract
  • Refund earnest money deposit
  • Relist the house

None of these options are appealing to the seller, which is why sellers prefer to have a kick-out clause for their protection. So, what exactly is a kick-out clause, and how does it work? Here’s what you need to understand.

What Is a Kick-Out Clause?

As the name suggests, a kick-out clause allows the seller to “kick out” the current buyer if a third party presents a better deal before the current buyer removes the contingency.

No seller wants to keep their house on the market and unsold for an indeterminate duration. That’s why they prefer a kick-out clause, as it gives them more freedom to keep looking for better deals.

Here’s a simple breakdown of how a kick-out clause works:

  1. You present an offer to buy a house, subject to home sale contingency
  2. The seller accepts the offer but inserts a kick-out clause
  3. Seller continues to market the house to potential buyers while waiting for you to remove the contingency

If the seller gets a better deal from another buyer, the seller will notify you about this. Then, you’ll be given 72 hours to make a decision. You’ll only have two options here:

  1. Buy the new house without selling your current home (which is difficult)
  2. End the contract and allow the seller to sell to the new buyer

On the other hand, if you manage to sell your house within the agreed-upon time, the sale contract becomes firm, and the seller is no longer entitled to the kick-out clause.

Now, let’s see how a kick-out clause affects both the buyer and the seller.

What a Kick-Out Clause Means to the Seller

Most sellers prefer a kick-out clause because it doesn’t tie them down to one buyer. A kick-out clause works in favor of the seller in that:

  1. It gives the seller a chance to get a better deal than what the current buyer is offering
  2. If the current buyer sells the old house, the sale goes through—a win-win for everyone
  3. If the buyer’s offer falls through, the seller will not have to relist the house

In short, a kick-out clause gives the seller flexibility and the chance to get a higher price for their home. However, a house on a contingency sale may put off potential buyers and reduce the seller’s prospects of getting new offers.

What a Kick-Out Clause Means to the Buyer

A kick-out clause allows you to make a contract on a house while waiting to sell your old home. Even so, it creates huge uncertainties with two major issues that you can’t control:

  • You can’t be sure when you’ll actually sell your current house
  • You can’t tell if a third party will make a better offer and eliminate your chances of buying the house

For these reasons, a kick-out clause is not good for the buyer unless you can match what the third party is offering. The good news is that there’s a simple way to overcome this problem. Let’s see how.

How to Avoid a Kick-Out Clause

Sellers are interested in making quick sales. For that reason, they prefer a buyer who doesn’t have a home sale or a financing contingency—simply put, a cash buyer. The only way you can beat that is by becoming a cash buyer yourself. And yes, it’s possible even if you don’t have liquid cash.

With UpEquity, you can make a full cash offer while still closing with a mortgage. It’s a safe, easy, and stress-free plan. Not only will you remove the finance contingency, but you’ll also improve your chances of winning a bid in a competitive sellers’ market. (By 4X, to be exact!)