Imagine you’re a home buyer. You’ve looked for months and have finally found the home of your dreams. Everything is in place. You have loan approval from your mortgage lender, have told friends and family about your big move, and have even begun to decorate the home in your mind. And then your real estate agent calls to tell you that the seller has accepted another offer, and you won’t be getting the house unless you do one thing.
Kick-out clause
The kick-out clause, sometimes called a “bump clause” or “escape clause,” is a stipulation home sellers sometimes include in a real estate purchase agreement. It’s there to ensure the home seller doesn’t get stuck waiting while a contingency is met.
Let’s say you’ve made the offer on a house, but as part of your purchase offer, you let the seller know that you have to sell your current home before you can close on theirs. At the time you make the offer, the housing market is a little wonky. There are rumors that interest rates may rise, and sellers are becoming nervous about selling their property before the market slows down.
By inserting a kick-out clause in the agreement, the home seller is letting you know that they accept your offer — unless something better comes along. After all, if the market does slow, it’s possible that your current home will not sell as quickly as you hope. The home seller is not willing to take the chance of being stuck.
Original buyer’s option
In this scenario, you have one option: Remove your contingency. When a seller employs the kick-out clause, they give you a specified timeframe to remove the contingency (or contingencies) originally agreed upon. In this case, you must agree to purchase the home before selling your property. If you can’t do that, the seller is free to move on to the new buyer.
When kick-out clauses are the most popular
Given today’s low housing inventory and the number of potential home buyers compared to the number of homes on the market, kick-out clauses are popular. In fact, kick-out clauses are common during a seller’s market.
It doesn’t matter what the contingency is. For example, a buyer may request a home inspection, a home appraisal that meets or exceeds the amount they’ve offered, or any other contingency. If the home seller includes a kick-out clause, there’s a chance the buyer will be faced with losing the house unless the buyer agrees to drop their contingency.
When kick-out clauses are less common
Kick-out clauses matter far less when it’s a buyer’s market. In other words, when there are more homes on the market than there are buyers, the few buyers there are get to call the shots. If they want to include every contingency under the sun in their purchase offer, home sellers do not have much room to negotiate. After all, with so many houses on the market, the buyers can move on if the seller does not agree to their terms.
Kick-out clauses are designed to protect sellers, and if you’re selling your home, you may be grateful to have the option available. However, if you’re a home buyer, you must weigh the danger of buying a home with no contingencies against the risk of losing a house you want.
Signing a mortgage without a home inspection means not knowing in advance any repairs or improvements you’ll need to make. Agreeing to buy a house without an appraisal means saying you’ll pay the offer price, even if the home appraises for less. In other words, home buying becomes riskier.
Only you can determine whether carrying through with the purchase is important enough to take on the additional risks.
