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The Pros and Cons of a 'Kick-Out' Clause

April 22, 2021

In this red-hot housing market, some sellers may be tempted to add a kick-out clause when countering an offer on their home. This type of contingency in a purchase agreement would allow a seller to continue to market their home even after they’ve accepted an offer. Buyers may want to proactively add this clause to their offer in order to make it more enticing.

Usually, this clause is added if the buyer has a contingency in their offer, such as needing to sell their current house to complete the home purchase. Essentially, a kick-out clause allows the seller to kick out the initial buyer’s offer if a preferable offer comes along.

“Every contract we negotiate where a buyer has to sell a property to purchase a property will have a kick-out clause or a contingency offer,” Ramona Williams, a real estate professional with Keller Williams Partners in Colorado Springs, Colo., told Clever in a recent article.

A kick-out clause may seem harsh, but some in the real estate industry say that it can benefit both sellers and buyers.

“The kick-out clause is used in both a buyer’s and seller’s market,” Redfin notes at its blog about the pros and cons of these clauses. “A kick-out clause ensures that the seller is not stuck in a drawn-out home sale in a buyer’s market; it keeps the buyer from having to carry two mortgages if they have trouble selling their house.”

The kick-out clause could prevent a buyer from taking on two mortgages if they have a contingency to sell their other home first. But the obvious con to these clauses for buyers is that they could lose out on a home if another buyer with a better offer comes along. Sellers typically must notify the initial buyer in writing if they do receive a more favorable offer—usually giving them a 72-hour window to make a decision. The buyer could choose to remove the kick-out clause and proceed with purchasing the property, or they could agree to forfeit the home. If they forfeit the home, they usually can receive their earnest money back, depending on the terms of the clause.

Also, if the first buyer sells their home within the contingency timeframe, the kick-out clause is void and sellers can no longer market the home to others, Quicken Loans explains about the clauses.

For a seller, these clauses allow them to continue to market their house. It can put them in a strong negotiating position since they already have an accepted offer, Redfin notes. But there are always risks of the second buyer backing out and the seller then losing the original and second offer. Also, houses actively marketed with a kick-out clause may be less attractive to buyers who know the original buyer could have a chance to match their offer, Quicken Loans notes.

Since drafting a kick-out clause can get complicated, a best practice is to have the clause reviewed by a broker or legal counsel before the parties sign the agreement. In addition, be sure that both the seller and buyer fully understand the terms of the kick-out clause, what triggers the clause, and what the parties’ rights are should the clause be activated. 

Read more about the nuances of kick-out clauses.

Source: 
What Is a Kick-Out Clause and How Do You Use It?” Redfin (April 21, 2021); “What Is a Kick-Out Clause?” Clever (Feb. 22, 2021) and “What Is a Kick-Out Clause and Why Do Sellers Like Them?” Quicken Loans (Jan. 11, 2021)