Many buyers are not able to afford the purchase of a new house until their current home sells first. Once their home sells, they can use the proceeds of their sale to be put towards to the purchase price of a new home. Even those who may be able to afford a new home without first selling their current property might not necessarily want to carry two mortgages until their current home finds a buyer.
In order to solve this issue, many buyers choose to make their offers contingent on the sale of their home. If their current property does not sell within a certain time period, they would then be free to walk away from the deal and not have to commit to buying a new home.
While this might sound ideal to buyers, it’s not exactly an attractive proposition for sellers. After all, sellers could wind up waiting for weeks until the buyer sells their home until closing. If the buyers are not able to sell their house during the specified time period, then the purchase agreement will become null and void and the buyers can walk away from the deal.
During this contingency period, the sellers would have lost out on other potential offers. That’s why many sellers tend to look unfavorably on real estate contracts that are contingent on the buyer’s ability to sell their current home.
However, sellers might have some recourse if they agree to entertain this type of contingent offer: with the inclusion of a “kick-out clause.”
What exactly is a kick-out clause, and how can it benefit sellers?
Kick-Out Clause: Defined
A kick-out clause is included in a real estate contract to allow sellers to nullify their agreement if they receive another offer from another buyer prior to closing. This clause allows sellers to continue to market their homes for sale in case another prospective buyer expresses interest in purchasing the home and submits a more attractive offer.
Basically, the seller is allowed to “kick out” the original buyer if another offer comes in. With such a clause in place, the seller can then cancel the contract and enter another one with a different buyer.
Sellers should include a time frame within which they are obligated to inform the original buyer, who will then have the opportunity to waive the contingency to sell their home and agree to purchase the new home. Otherwise, they can back out of the deal and allow the seller to continue entertaining another offer. While this time period can vary, 72 hours is typical for this type of contingency.
Can the Buyers Afford Your Home Without Selling Theirs First?
A kick-out clause is great for sellers in that it allows them to avoid wasting any time that could have been spent marketing to others and finding a better offer. Under this agreement, the potential buyer can have the contingency removed and carry on with the deal if the seller finds someone else who is interested in the property.
But sellers need to be satisfied with any evidence that the buyers have shown regarding their ability to afford a home purchase without having sold their present property. Buyers will need to show sellers that they are still capable of securing a mortgage for a new home purchase, regardless of whether or not they’ve been able to successfully sell their home.
Many times buyers won’t be able to get approved for a mortgage because they don’t have the financial means of carrying two mortgages at the same time. Sellers need to be aware that if they choose to work with the original buyers after waiving their contingency to sell their home, the buyers must strong proof that a mortgage approval is imminent.
Kick-Out Clauses Offer a Meeting Ground Between Buyers and Sellers
A kick-out clause allows buyers and sellers to compromise with each other if there is another property in the picture that must be sold. That being said, sellers should require that buyers start marketing their home right away. The sooner the home is listed and marketed, the sooner it will be able to find its own buyer and sell in time to put the proceeds of the sale towards the new purchase.
It’s recommended that sellers carefully word their kick-out clause to ensure it clearly stipulates that if the buyer fails to list and start marketing their home within a specified time frame, the seller can then exercise the right to nullify the purchase agreement and look for a different buyer.
The Bottom Line
It’s not uncommon for some buyers to want to ensure their current home is sold before they agree to buy another house. Nobody wants to have a mortgage on two different properties if it can be avoided. That’s why some buyers choose to insert a clause in their real estate contracts that give them the chance to sell first before buying another home.
But from a seller’s point of view, that’s a gamble. They could very well be sitting around waiting for the buyer to sell their own home, when this may never happen. In the meantime, they could have lost out on countless other potential offers, which may have been even better than the one they’re currently entertaining.
That’s why kick-out clauses exist. they offer a compromise for both parties to help ensure a deal is successfully completed. But sellers need to make sure that their kick-out clause is carefully written and detailed with the help of a seasoned real estate professional in order to avoid any loopholes.