Like any profession, real estate has its own jargon that people outside the industry may not always understand. Online listings include terms that indicate a property’s status that are sometimes confusing to buyers.
We asked Laura Schwartz, a real estate agent with McEnearney Associates in McLean, Virginia, and Meredith Margolis, a real estate agent with Compass in Washington, D.C., to explain some of these terms, focusing especially on kick-out clauses. They both responded via email. Their responses were edited.
Q: What does it mean when a home is labeled “pending” or “under contract with a kick-out clause” in a listing?
Schwartz: Our Multiple Listing Service (MLS) has two statuses to indicate a contract has been accepted on a home. “Active under contract” means there are contingencies in place and the house may still be shown to accept backup offers. It’s important to note that in many states, a seller can’t cancel a contract once it’s accepted in writing. The buyer is the only one who can void a contract. “Pending” means a seller has accepted a contract in writing and does not want the home to be shown any more. Usually in practice, that means all contingencies have been met.
Margolis: If a property is pending or under contract, the contingency periods have passed and/or the property is successfully proceeding to settlement. If a property is under contract with a kick-out clause, it means the property is under contract and the purchaser of that property can be kicked out of the contract if the purchaser does not meet the criteria mutually agreed upon in the contract. A common kick-out clause usually pertains to a sales contract that is contingent on the sale of another property.
Q: What are the other listing statuses that are reported and what do they mean?
Schwartz: An “active” listing is fully available to show and no contract has been accepted. When a home is listed as “temporarily off market,” that usually means the seller needs the home to be unavailable for showings. That could be because it’s not ready to show, they have guests visiting or they’re packing for a move. When a property is “withdrawn,” that means the property has been pulled off the market, but an active listing agreement is still in place. A “canceled” status means the property has been pulled off the market and the listing agreement has been terminated or the agreement has expired.
Margolis: An “active” status means the property is for sale and available. Once a property receives an offer with one or more contingencies, and it is accepted, that property is “active under contract.”
Q: What is a kick-out clause and how does it work?
Schwartz: A kick-out clause usually means there’s a home sale contingency — which means a buyer must sell their home in order to purchase the home under contract. That contingency can be “kicked out” if a seller delivers them formal notice and the buyer can’t or doesn’t want to move forward without that protection. If the buyer does choose to walk away, the second offer would move into first place and proceed as they normally would with any other contract. Our MLS status, though, is somewhat confusing and misused: “Active under contract” doesn’t necessarily mean there’s a kick-out clause; it could be any number of contingencies, such as a home inspection, an appraisal, homeowner association document review, etc., none of which can be used by a seller for a kick-out option.
The other type of kick-out clause is to protect a seller. It’s called a “home of choice contingency” and basically it gives a seller an allotted amount of time to go find a new house to buy or they don’t have to sell their current house and the contract voids. In a market like the one we just went through, that was probably used a few times. You need a flexible buyer who can wait out the time (sometimes 30 to 45 days), because during that time, they go through all of the regular contingencies — inspection, appraisal, HOA review, etc. But in the end, if the seller can’t identify a new home, the buyers have to start over.
Q: How does a kick-out clause affect buyers and sellers who have signed a contract?
Schwartz: When a kick-out clause is accepted, the contract has details on how many days a buyer has to list their home for sale and how many days they’ll have to respond if a seller gets another offer and delivers notice to the first buyer to either remove the home sale contingency or void the contract. The original buyer can choose to move forward with the original contract by removing the kick-out clause or they can void their contract and be released pursuant to the terms of their contract.
In a seller’s home of choice contingency, the buyer can’t void. They just have to wait out the time they agreed to in the contract. Their opportunity cost is all of the other homes that may come to market during the time they’re waiting.
Margolis: A kick-out clause gives the seller some protection and flexibility and it helps the buyer get the time they need to sell their home in order to qualify for the next purchase. Perhaps a buyer will pay a premium for that home sale contingency they are offering. The seller benefits from the higher contract price and if the buyer is selling a house in a favorable area for the right price, it could be advantageous for both parties.
There is specific language in the sales contract that provides a road map of how a seller could kick out their primary contract if another stronger offer is submitted and the seller prefers to work with that secondary offer.
Q: Are kick-out clauses common?
Schwartz: That depends on the market. In a seller’s market, it’s unusual for a seller to accept a kick-out clause, mostly because when they have multiple offers to choose from, rarely will one assume the additional risk of a kick-out clause. In a buyer’s market, where homes can take longer to sell, a seller may consider a kick-out clause if they have no other options.
One other thing to note, we have the option as listing agents to input this information into a listing. If a seller does not want to entertain a home sale contingency, we can note that in the listing.
In a market like the one we just went through, I did see a few home of choice contingencies. You have buyers who were eager to do whatever they needed to do, so asking them to wait a few weeks wasn’t such a huge favor as it might be in a different market.