So-called “kick-out clauses” are becoming more coming in real estate deals these days, with sellers often insisting on it due to their privileged position, with their homes attracting multiple offers.
A kick-out clause is a contingency in a purchase agreement that enables the seller to continue to offer their home for sale even after a bid has been accepted. Should they receive a better offer, they can then back out of the deal and accept the new bid instead. The clause has traditionally been added when buyers have a contingency in their offer, such as the need to sell their own home first in order to complete the purchase.
Some buyers also proactively add a kick-out clause to make their offer seem more enticing.
Ramona Williams, a real estate professional with Keller Williams Partners in Colorado Springs, Colo., told Clever in a February interview that kick-out clauses are very common. “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,” she said.
Kick-out clauses have become more widely used in recent months though, because some home sellers are in such a strong position, with multiple people bidding for their homes, that they can easily get away with insisting on it.
The kick-out clause puts buyers in a stronger negotiating position with other bidders, because they can turn around and say they already have an offer on their home. But, as Redfin explains, there is a risk that the second buyer may back out, resulting in the seller losing both the original and the second offer. In addition, houses that are marketed with a kick-out clause can be less attractive to buyers who realize that whoever made the original offer has the chance to follow up with another, improved bid. Some buyers don't want to get caught up in bidding wars.
But buyers can benefit from a kick-out clause too.
“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. “It keeps the buyer from having to carry two mortgages if they have trouble selling their house.”
With a kick-out clause, the usual condition is that the seller must notify the buyer in writing if they receive a more favorable offer. Then, the buyer will have a 72-hour window to decide whether to increase their own offer or pull out of the deal. Should they decide to forfeit the home, they can usually get the earnest money they paid down back, although this will depend on the terms of the contract they signed.
Drafting a kick-out clause can be complicated, so most experts advise having the clause reviewed by a broker or legal counsel before the parties sign any agreement. Buyers and sellers should also ensure they fully understand the terms of the kick-out clause, what can trigger it, and what their rights are when it’s activated.