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If phrases like “72-hour kick-out clause” make you think, “ I can’t understand legalese,” let’s start with an example of an informal kick-out clause that you can relate to.
Say you’re visiting yard sales on a Saturday morning and you come across the perfect wicker patio set, exactly what you’ve been looking for. You offer the owner $200 but explain you don’t have the cash with you and that you need to run by the bank. The owner agrees but refuses to put a “sold” sign on the set because she’s concerned you might not return.
While you’re driving to the ATM, the owner calls and says someone else has offered $225 for the patio set and has cash in hand. The owner is going to sell the furniture to the other buyer unless you can beat their offer and get back fast with the money.
You’re facing being kicked out of the deal because someone has made a better offer.
A 72-hour kick-out clause in real estate works in much the same way, except the stakes are higher, the rules are written in a formal contract, and the time frame is extended.
72-hour kick-out clauses (they really don’t have to be for 72 hours) can be a valuable tool for buyers and sellers in a real estate deal. Kick-out clauses are often employed when the buyers have to sell their current home first, and the sellers want to continue marketing their home in the meantime. Understanding the implications of a kick-out clause can make the difference between buying the home you want and being saddled with two mortgages (or not being able to qualify for financing).
We’ve done the research, read contract language, and talked to a veteran real estate agent to learn what buyers need to know about 72-hour kick-out clauses.
What is a 72-hour kick-out clause?
A kick-out clause is a section of the real estate contract that allows the seller to continue to market a home that is under contract because the buyer has included a contingency that must be met before they will purchase the home. These clauses are most often used when a buyer needs to sell their current home before purchasing a new one.
With a kick-out clause, if the sellers receive a better offer, they notify the first buyers of the offer. The first buyers must remove the contingency clause and possibly give the seller additional earnest money to keep the contract in force. Otherwise, they can be “kicked out” of the agreement, and the sellers can proceed with the offer from the new buyers. The amount of time the buyer has to act is specified in the contract. It could be the traditional 72 hours, but more likely, it will be 48 hours, 24 hours, or even 12 hours, says Teresa Cowart, a real estate agent who has sold 77% more single-family homes than the average agent in Savannah, Georgia.
The kick-out clause is used to protect the buyer’s earnest money. If the seller activates it and gets another offer, the buyer has time to either remove the kick-out clause and move forward or to say no thanks, and the seller can sell to Buyer B.
- Teresa Cowart Real Estate AgentCloseTeresa Cowart Real Estate Agent at RE/MAX Accent
- Years of Experience 18
- Transactions 2193
- Average Price Point $246k
- Single Family Homes 1877
Why would a seller want to add a kick-out clause to my contract?
A seller is most likely to want a kick-out clause if there’s a contingency to your offer. A contingency is a condition that must be met for the purchase to proceed. The sellers may see every contingency as a possible roadblock that could delay or prevent you from completing the sale.
Therefore, the sellers may want to keep their options open in case a different buyer comes along with a better offer. The second buyer might offer more money or place fewer conditions on the deal, making the seller believe the home sale would be more likely to make it to the closing table.
Examples of contingencies that may cause the seller to add a kick-out clause:
- A home sale contingency. The home sale contingency gives the buyer time to sell their current home before they proceed with the purchase of the new home. Cowart estimates that 90% of the time she’s dealt with kick-out clauses, it’s been because the buyers need to sell either their primary home or secondary property, such as a beach house. It’s common for buyers to use the equity in their current house to help finance the next one, so home sale contingencies are not unusual when the market isn’t red hot. Such contingencies often give the buyers limited time, such as 30, 60, or 90 days to sell their old home.
- An inspection contingency. The inspection contingency allows the buyer to bring in an expert to check the home over for unseen problems before finalizing the contract. The buyers must have the home inspected within an agreed-upon amount of time, and they can then negotiate the cost of repairs with the seller if the inspection uncovers issues. Without this contingency clause, the buyer would be responsible for paying for any repairs without asking the seller to chip in.
- An appraisal contingency. If you need to take out a mortgage to buy the home, your lender will require an appraisal, or an evaluation of the home’s fair market value. The lender can only loan you a certain percentage of the home’s value, and if the appraisal comes in lower than expected, you might not qualify for the loan amount you need to purchase the house. With an appraisal contingency, you may be able to negotiate the price with the seller if the appraisal is low, or you may have the right to get your earnest money back and walk away if you can’t get the financing you need.
You can see why putting any of these conditions on the sale could make a seller nervous about whether the deal will make it to the closing table — and why they might want to add a kick-out clause.
However, in Cowart’s area, buyers are the ones who typically add a kick-out clause to the contract. “The kick-out clause is used to protect the buyer’s earnest money,” she explains. “If the seller activates it and gets another offer, the buyer has time to either remove the kick-out clause and move forward or to say no thanks, and the seller can sell to Buyer B.”
Cowart has seen several instances where another buyer has come in with a better offer. The kick-out clause really only gives the first buyer the first right of refusal. “If they aren’t willing to take the risk, they have to let the house go,” she notes.
As with many things in real estate, it often comes down to timing, Cowart adds. “If someone else makes an offer when it’s a week before [the first buyers are] supposed to close on their other house and they’ve gone through due diligence, they might go through with the deal. If it’s early in the process and they have substantial earnest money involved, they might not want to take that chance.”
How does a 72-hour kick-out clause work?
Let’s follow a kick-out clause in action, so you can get a sense of how it works and how it can affect your decisions about the house.
First, you find a house you would like to buy and you make an offer on it. However, you have to sell your current house to get the financing you need, so you add a home sale contingency clause to your offer.
The seller makes a counter-offer that includes a kick-out clause. The home will continue to be listed for sale on the MLS, and other potential buyers are welcome to look at the house.
You accept the counter-offer because you must sell your house first. You pay the earnest money you promised in your offer, and the money is put into an escrow account, which is overseen by a neutral third party.
At this point, some buyers get emotionally attached to the house and think of it as “theirs,” Cowart says. “Buyers sometimes get upset that the house is still being shown. It clearly says in the kick-out clause the seller has the right to do that. They are still going to market it until you are in a position to remove the kick-out clause.”
Now, let’s say the sellers get a better offer on the house, whether it’s more money or a deal that can move quickly because there’s no home sale contingency. The seller’s agent will provide details about the other offer (without providing the buyer’s identity) to prove it’s a serious agreement.
The kick-out clause has now been activated, and you must act within the amount of time listed in the contract. If you agreed to 72 hours, you have that much time, but it’s likely the seller didn’t want to wait that long and put a shorter time in the kick-out deal. Sellers might worry a second potential buyer won’t want to wait three or four days for an answer, so the sellers may have given you a 24-hour kick-out period. (That’s another reason it’s important to read every bit of the contract before you sign it.)
Discuss your options with your agent. You may want to change your offer to meet or beat the new buyer’s offer. Here are a few of your options:
- If the new buyer offered a higher purchase price, you’ll have to decide if you want to match the new, higher offer.
- If the new buyer’s offer has fewer contingencies, you have the chance to remove the contingencies from your own purchase agreement. In that case, you have to decide if you’re willing to take a chance on whether your old home will sell before you need to close on the new house. (You may decide to lower the asking price or add other incentives to try to attract a buyer for your current home.) If you can’t sell the old home, you may be responsible for two mortgage payments, one on the old house and one on the new one. Or, you might not be able to qualify for your mortgage on the new home.
- The seller might also ask for additional earnest money.
If you decide to move forward with the purchase, your agent will submit an addendum to the purchase agreement to the seller including the higher price or eliminating the home sale contingency. The seller may ask for proof that you can afford the higher price or proof that you will be able to get the necessary financing even if you can’t sell the other house. If you can’t afford two mortgages, you may have to drop out of the deal.
If you decide that you can’t proceed with the deal because you don’t want to pay more for the house or you can’t take the risk of possibly paying two mortgages at once, you can back out of the deal. As long as it was specified in the contract, you should get back your earnest money. The seller can proceed to sell the house to the second buyer.
If you don’t respond in the specified time period, the seller kicks you out of the contract and can accept the offer from the second buyer.
In the end, the kick-out clause protects your earnest money in a situation where another buyer makes a better offer than you can make. It also gives you the right of first refusal, allowing you to decide whether to match the better offer or to refuse to match and start your home search over again. It doesn’t guarantee you’ll be able to sell your old house and buy the new house you want, but it might help you reach those goals.
Header Image Source: (Joel Durkee / Unsplash)