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In a tough real estate market more buyers have to sell their homes before being able to purchase a new home. This hasn't kept buyers from looking at homes for sale but in many cases it has prevented them from being able to buy a new home. Some buyers try to get a seller to agree to a "I need to sell my house first" contingency. This is disaster for the seller. The seller's agent has to mark the property as contingent in the local MLS which will prevent new buyers from coming in with an offer should the existing contract fall through. The contract can fall through if they don't sell their house in the time specified. Many buyers' agents won't even show properties with contingent status. And if a new buyer does want the home, the seller has no recourse should another buyer decide to make an offer that is acceptable to the seller. That's where the kick-out clause has gained popularity.
What is a kick-out clause? A kick-out clause is used when a home buyer places a house under contract with the understanding that he/she must sell his/her current house before finalizing the new purchase. Sellers holding a contract with a kick out clause continue to market the home as active (you must include such language in the clause). Many agents will not list the house as contingent. If the home seller receives another offer, the buyer has a specific amount of time as stipulated in the clause (sellers look for 24 hours, where buyers look for 72 hours) to remove the contingency and move forward to buy the house, whether his existing house is sold or not. If the buyer cannot move forward, the seller can back out of the original contract and sell to the new buyers.
A draw back to the kick out clause from the seller's point of view is the lack of negotiating ability with a new buyer. The seller can't exactly sign a contract to sell the home if he already has a contract to sell the house to another buyer. The seller could disclose to the new buyer that they are negotiating a "back up" contract, but that may drive the buyers away. One way to negotiate any new contracts that may come in while the house in under contract with a kick-out clause is verbally negotiate back and when the terms are acceptable to both parties have the new buyers write up the contract giving the seller 2 to 3 days to "accept" (sign) the written offer. This will give the seller time to get the existing contract's contingencies waived by the existing buyer as specified by the terms of the contract. If the buyer cannot waive the contingency and move forward with the deal the seller can back out and accept the new offer.
Things to look for if you plan on accepting a kick-out clause on your home are other contingencies. Contracts will usually have financing contingencies, inspection and appraisal contingencies, etc. Make sure all contingencies are met in a reasonable amount of time after the acceptance date. The acceptance date is the date on which all parties have signed and bound the contract. The only contingency that a seller may allow to remain along with the kick-out clause is the financing contingency because many buyers will not be able to obtain financing for a new home without selling their existing home. The seller should specify that the buyer has somewhere between 10 and 30 days after waiving the kick-out clause to satisfy the financing contingency if it is not possible to have the financing contingency met beforehand. Keep in mind that this extra time may force your secondary buyer to walk and find another deal in that time frame so that may or may not be something you would be willing to consider.
There are a lot of details and legalities when dealing with real estate contracts. Please seek the advice of trained professionals when entering into any legal contract.
Posted by: --REguy