The Kick Out Clause
Adds Flexibility to our Seller Clients
There may be instances when a buyer makes an offer which is contingent on the buyer's ability to sell their existing home. The seller may want to accept the offer, but has reservations about the proposed contingency. The seller may have apprehensions about taking the property off the market while the buyer attempts to sell their current home in order to close on the new home.
In this case, the dilemma is that the seller may miss more viable opportunities to sell the home as the seller awaits the sale of the buyer's home. If the seller is going to accept this contingent offer and understanding that anything could happen during this period that might hinder the close of the sale, the buyer might want to insert a Kick Out Clause into the sales contract.
Generally speaking, when buyers present an offer to purchase, they can include a contingency for the sale of their house. This is known as a "contingent contract." In simple English, this means that if the specified event does not occur -- in this case the buyers do not sell their house -- then the contract to purchase the new property becomes null and void and the purchasers are entitled to a full refund of any earnest money deposit.
Needless to say, as stated above, sellers do not want to take their house off the market for an indefinite period.
Accordingly, a compromise has been developed, known as a "kick-out" clause. Under this arrangement, the sellers state in the contract that while they are willing to accept a contingency contract, the sellers will continue to market the house. If another qualified buyer is found, the seller will give the current purchaser a certain amount of time -- usually 72 hours -- in which to remove the contingency (keep the contract alive) or exercise the contingency and decide not to purchase the new property.
This kick-out clause has to be carefully drafted. If the potential purchasers are confronted with the 72 hour kick-out period, and decide to delete the sale contingency, they may still be able to get out of the original contract if they cannot get financing. Keep in mind that most standard sales contracts also contain another contingency, namely the ability of the purchaser to obtain the necessary financing.
This creates a dilemma for both parties. If the purchasers remove the sale contingency but still have the financing contingency in the contract, it is probable that a lender will not give a binding loan commitment to the purchasers unless they sell their house first. Thus, the mere removal of the sale contingency does not meet the seller's needs. The purchaser can still find an excuse to back out of the contract, based on another contingency in the contract.
Thus, Real Estate Kingz understands the importance of using the correct language used in the Kick-out clause to bring about the very best outcome for our seller clients.
Under this contractual arrangement, the potential purchaser has the right to delete the contingency and go forward with the purchase. But the purchasers also have to demonstrate, to the satisfaction of the seller, they are financially able to qualify for the loan. In many instances, the purchasers will not be able to satisfy the seller, because they obviously do not have the funds to permit them to go forward with the purchase.
From the sellers' point of view, this is an acceptable arrangement. Although the sellers have signed a contract, in effect they are keeping the house on the market. The sellers have the right to continue to show it to other potential purchasers, and have the right to take back-up contracts if possible.
Remember, Kick-out clauses allow Real Estate Kingz to continue to market your house even after you have signed the first sales contract.
From the buyer's point of view, the 72 hour kick-out is also an acceptable compromise -- but obviously is subject to abuse. The buyer can understand that a seller is reluctant to take the house off the market when the contract is subject to a selling contingency. On the other hand, if a seller obtains a higher price for the house from a third party, the seller has the ability to be arbitrary by using the excuse that the current purchaser is not financially able to purchase, thereby giving the seller the right to sell to a third party.
The 72-hour kick-out clause is a compromise for both parties and has become an acceptable practice in the real estate arena.
However, the sellers should also insist that the buyer immediately begin to market their own property -- whether it be through a real estate firm or on their own. Specific language should be included in the contract that if the purchaser does not begin to market the property within a reasonable period of time -- for example 5 days -- then the seller has the right to void the contract and look for another buyer.