How Does a Kick-Out Clause Work in S. California?

Selling a property is a complicated, multi-step task. For those in Southern California, juggling negotiations, contracts, and deadlines can be overwhelming. Homebuyers often face unexpected situations that add complications, such as contingent offers, leaving them unable to proceed with closing immediately and potentially putting the sale in limbo. Offers with contingencies are not a drawback if you know how to protect yourself as a seller, and one way is by including a kick-out clause in your purchase agreement.

This allows you to continue marketing your property even though there’s already a contract. If you find a better offer, your original buyer can either address their contingency or risk being “kicked out” of the contract. How does this work, exactly? What considerations should home sellers keep in mind?

Below, My Home Sold shares everything that Southern California residents need to know.

What Is a Kick-out Clause in Real Estate?

California properties typically stay on the market for between 30 and 50 days, and the longer that homes remain on the market, the higher the expenses. A homebuyer with a contingent offer is one of the factors that prolongs a real estate transaction. You may end up spending more than 9.93% of the sale price while in limbo.

A contingent offer happens when the buyer has expressed their willingness to buy the property, but they are dependent on something else to proceed with the sale. Primarily, contingency offers occur when homebuyers need to sell their current house first to access the equity. This uncertainty may leave you waiting for long periods before closing the sale.

A kick-out clause provides a layer of protection for sellers. This language gives you the right to continue marketing your property while the homebuyer addresses the contingency. If an offer comes with better terms, the clause gives the original buyer 48 to 72 hours to resolve their issue, or they lose the contract.

Who Should Use It?

These are necessary in various cases. If you find yourself in the following circumstances, then having a kick-out clause may put you at an advantage.

Buyer Has Considerable Contingencies

When a buyer’s offer is appealing, but they have considerable contingencies, then the clause is a good idea. The longer the buyer is unable to address the issue, the more expense on your end. Before closing, you’re still required to pay property utilities, taxes, and insurance premiums. This gives you a chance to work with other buyers who are more willing to proceed with the purchase.

You’re in a Seller’s Market

Southern California is a consistent seller’s market, even though the scales tip to the other side now and then. In a seller’s market, property owners have more leverage since assets are more in demand. Having this clause is a way to keep the property available for more competitive offers.

The Deadline Is Tight

Some situations leave little room for delays. A property owner may be relocating for a job or have financial obligations that need to be immediately addressed. Working with a contingent offer may result in unnecessary delays. This helps provide assurance for sellers and raises urgency for buyers.

Buyer Has Financing Issues

Most of these are reserved for buyers that are yet to sell their real estate asset. However, this language can also apply to those who are facing difficulty securing financing or mortgage approvals.

How Does It Work?

Let’s create an example scenario where a kick-out clause applies.

1. You Accept the Offer From the Buyer

After your property has been on the market for a week, you receive an attractive offer from Buyer A. However, they still haven’t sold their current property, which will be the primary source of funds for acquiring your home. You accept the offer, but the purchase agreement now includes a kick-out clause, so you won’t have to wait weeks or months to sell your home.

2. Inclusion of Kick-out Clause in MLS Listing

Your agent updates the details on MLS listings, including a “kick-out clause” status to indicate that the property is already under a purchase agreement but with strings attached. This status signals to other buyers that your real estate asset is still available.

3. Another Buyer Makes an Offer With Better Terms

Buyer B sees your listing and expresses interest. Their offer is more favorable, so you want to proceed with them instead of Buyer A.

4. Kick-out Clause Activates

You notify Buyer A regarding the new offer, which means the kick-out clause has begun to take effect. Depending on what’s outlined in the contract, they have up to 72 hours to address the contingency.

5. Original Buyer Addresses Contingency or Walks Away

Within the given timeframe, Buyer A must present proof that they’ve resolved the contingency. For example, they must show a signed offer for their property. Otherwise, their contract will be cancelled.

What Are the Advantages and Disadvantages 

They have pros and cons that you must consider before including them in purchase agreement contracts. Here’s some of what you can expect.

Pros

1. Keeps you in control of the sale, even if the buyer’s contingency is out of your hands.
2. The clause can help you avoid lengthy delays and the additional expenses associated with these setbacks.
3. Since the listing is still visible, you can attract other buyers who may have better terms.
4. The existence of the clause drives the buyer to resolve the contingency more quickly.
5. The clear timeframe provides definitive deadlines and avoids confusion if a more appealing offer comes along.

Cons

1. Fewer buyers may engage with the listing because of the existence of the clause. A shrinking pool of prospective buyers can add delays to the sale.
2. It can also create a tense atmosphere during negotiations, especially in a balanced market.

 

What Tips Can Home Sellers Follow for Successful Kick-out Clauses?

Incorporating kick-out clauses in real estate contracts isn’t a small matter. Such an inclusion can invalidate the purchase agreement, so care and due diligence must be practiced. Here are some tips you can follow.

Work With Experienced Agents

A real estate agent with extensive experience in Southern California markets can help you navigate this tricky situation with ease. Their guidance helps you draft a contract with plain language outlining the details of the kick-out clause. If the clause is triggered, they can negotiate or communicate on your behalf.

Verify Buyer’s Status

A little investigative work can help you avoid headaches in the future. Information about properties is usually available publicly, so you can verify if your buyer’s house is actually listed for sale. Plus, you can check if the property is in a hot neighborhood or seller’s market, helping you determine if the chances of them selling soon are high.

Create a Back-up Plan

There’s no guarantee that a better offer will come along, so even if the kick-out clause is there, it may never be activated. This possibility could lead to prolonged delays and more expense on your end. As such, it’s good practice to have back-up plans in case your buyer cannot resolve the contingency. You may add a “time of essence” clause to define a deadline, allowing you to walk away if the contingency remains unresolved.

Try Alternatives

The headaches of contingent offers or the tension of enforcing kick-out clauses can be avoided altogether if you avoid the traditional real estate sale. There are other options, such as working with a cash buyer like My Home Sold, who can help you streamline your property sale and avoid lengthy delays.

What Alternatives Can Home Sellers Try?

The easiest option for Southern California property owners is working with companies like My Home Sold. We offer a streamlined process that avoids the bureaucracy of a traditional sale. Plus, we don’t require you to fix any existing damage, evict existing occupants, or address tax or legal issues. You simply need to send details about your property, and we’ll return with a competitive cash offer that you can accept or not. Our process also allows you to close in as little as seven days. You’re fully in control the whole time.

We’ve worked with many types of property owners, including landlords, heirs, and first-time sellers who want to avoid the hassle of negotiations and marketing. Ready to sell your home fast? Learn the current value of your property with a free cash offer today.