A "kick-out clause" in real estate, also known as a "kick-out contingency," is a provision within a purchase agreement that allows a buyer to terminate the contract if they can't secure financing for a subsequent property purchase. It's a crucial element for buyers involved in a chain transaction, where the sale of their current home is contingent upon purchasing a new one. This guide delves into the intricacies of kick-out clauses, explaining their purpose, how they work, and potential pitfalls.
What is a Kick-Out Clause in Real Estate?
Essentially, a kick-out clause gives the buyer a specific timeframe (typically 7-14 days) to find a buyer for their existing home after they've accepted an offer on a new property. If they successfully find a buyer within that timeframe, the contract for the new property proceeds. However, if they fail to secure a buyer for their current home within the stipulated period, they can back out of the new purchase agreement without penalty (assuming the clause is properly worded and the conditions are met). This protects the buyer from being stuck with two mortgages or facing potential financial difficulties if the sale of their current home falls through.
How Does a Kick-Out Clause Work?
The effectiveness of a kick-out clause hinges on its specific wording and the conditions stipulated within the purchase agreement. Generally, it will include the following elements:
- Timeframe: A clearly defined period allowing the buyer to secure a buyer for their existing property.
- Conditions: Specific conditions the buyer must meet, such as having an accepted offer on their current home, satisfying appraisal requirements, and/or providing proof of the offer to the seller of the new property.
- Contingency: The agreement states that the buyer's obligation to purchase the new property is contingent upon the successful sale of their existing property within the allotted timeframe.
- Release: The buyer is released from their obligation to purchase the new property if they can't secure a buyer for their current home within the specified time frame.
The clause typically provides a mechanism for the buyer to provide proof of their efforts, such as a copy of the accepted offer on their current property.
What are the Advantages of a Kick-Out Clause for Buyers?
The primary advantage is protection against financial risk. In a competitive market, buyers may find themselves in a position where they need to sell their existing property to purchase a new one. The kick-out clause mitigates the risk of being obligated to purchase a new property while their existing home remains unsold, potentially leading to financial strain.
Secondly, it provides flexibility and peace of mind. Knowing they have a way out if the sale of their current home doesn't go as planned reduces stress significantly during a potentially hectic home buying process.
What are the Disadvantages of a Kick-Out Clause for Sellers?
From the seller's perspective, a kick-out clause introduces uncertainty. They run the risk of losing the buyer and having to start the entire process again, potentially at a lower price or with less favorable terms. The seller also may face a delay in completing the transaction.
What Happens if the Buyer Doesn't Find a Buyer for Their Existing Home?
If the buyer fails to meet the conditions of the kick-out clause within the specified time, the agreement stipulates that they are released from their obligation to purchase the new property. The seller, however, might be left to find another buyer, potentially facing market fluctuations and lost opportunity costs.
Is a Kick-Out Clause Always Approved?
The acceptance of a kick-out clause is subject to negotiation and depends heavily on the specific market conditions and the individual circumstances of both the buyer and the seller. In competitive seller's markets, sellers might be less inclined to accept such clauses.
Can I Negotiate a Kick-Out Clause?
Absolutely. Both buyers and sellers can negotiate the terms of a kick-out clause. Negotiations might center around the length of the contingency period, the required documentation, and other specific conditions. It's advisable to consult with a real estate attorney to ensure the clause is properly worded and protects your interests.
What if My Offer is Contingent on Selling My Current Home, But There’s No Kick-Out Clause?
This situation puts you at higher risk. It means your offer to purchase the new home is directly dependent on the sale of your existing property. Should your existing home's sale fall through, you may not be able to back out of the offer without significant penalties, as stipulated in your contract. This highlights the importance of negotiating a robust contingency plan, preferably incorporating a kick-out clause.
This information is for educational purposes only and does not constitute legal advice. It's crucial to consult with a real estate attorney to discuss your specific situation and ensure your rights are protected.
