Definition
A Kick-Out Clause is a specific provision within a sales contract that grants the seller the right to cancel the existing contract if a better offer is received before the final closing of the property sale. This clause offers sellers a level of protection and flexibility, particularly in uncertain or fluctuating markets.
Examples
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Example 1: The Elways placed their home on the market and received a lowball offer from the Fenders. Uncertain about how well their home would sell, they accepted the offer, but included a kick-out clause in the contract. This allowed them to entertain higher bids that might come in before the sale finalized.
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Example 2: Sarah, a homeowner, received a purchase offer from a buyer with a contingency to sell their own home first. Sarah accepted it with a kick-out clause, enabling her to continue showing her property. If a superior offer came along, she had the liberty to notify the first buyer to either remove the contingency or step aside.
Frequently Asked Questions (FAQ)
Q1: How does a kick-out clause benefit sellers?
- A1: It allows sellers to keep their property active on the market until a more secure (non-contingent) offer is received and accepted, potentially leading to a higher sales price or quicker sale.
Q2: Are buyers disadvantaged by a kick-out clause?
- A2: Buyers may face uncertainty, as their agreement could be voided if the seller finds a better offer. This clause often incentivizes buyers to make stronger initial offers or expedite their contingencies.
Q3: How does a kick-out clause impact the buying process?
- A3: Buyers with kick-out clauses in their purchase contract need to be prepared to act quickly should the seller receive a better offer. They might need to either remove contingencies or offer better terms to keep the contract valid.
Q4: Is a kick-out clause common in real estate transactions?
- A4: While not universal, kick-out clauses are relatively common in markets with high competition or where properties are in high demand.
Q5: Does the seller always have to take the better offer with a kick-out clause?
- A5: The seller has the option but is not obligated to take the better offer. The clause simply allows the flexibility to exit the current agreement if a superior offer is identified.
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Contingent Offer:
A purchase offer that is conditional upon certain criteria being met, such as the buyer selling their current home first.
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Escape Clause:
A general term referring to a provision in a contract that allows a party to back out under specific conditions, which the kick-out clause exemplifies.
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Earnest Money:
A deposit made to a seller showing the buyer’s good faith in a transaction, which may be forfeited if the buyer backs out without meeting contingents.
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Closing:
The final step in executing a real estate transaction, where the buyer and seller exchange funds and ownership transfers.
Online Resources
References
- Realtor Magazine - Kick-Out Clause
- HGTV - Understanding Real Estate Contract Clauses
Suggested Books for Further Studies
- “Your First Home: The Proven Path to Homeownership” by Gary Keller.
- “The Book on Rental Property Investing” by Brandon Turner.
- “Real Estate Investing for Dummies” by Eric Tyson and Robert S. Griswold.
Real Estate Basics: Kick-Out Clause Fundamentals Quiz
### What is the primary purpose of a kick-out clause?
- [ ] To provide the buyer with more leverage.
- [x] To allow the seller to entertain and accept better offers.
- [ ] To establish a shorter inspection period.
- [ ] To ensure the buyer has time to secure financing.
> **Explanation:** The primary purpose of a kick-out clause is to give sellers the flexibility to accept a superior offer before closing if one comes in, and thus protect the seller’s interests.
### In what kind of market is a kick-out clause particularly beneficial?
- [ ] In a buyer's market.
- [x] In a highly competitive or seller's market.
- [ ] In a stagnant market.
- [ ] In a declining market.
> **Explanation:** Kick-out clauses are particularly beneficial in highly competitive or seller's markets where the opportunity for better offers is higher.
### Who typically has the advantage when a kick-out clause is included in a real estate contract?
- [x] The seller
- [ ] The buyer
- [ ] The real estate agent
- [ ] The lender
> **Explanation:** The seller typically has the advantage because the kick-out clause provides them the opportunity to consider better offers before finalizing the sale.
### If a seller receives a better offer, what must they do according to the kick-out clause?
- [x] Notify the existing buyer, allowing them to waive contingencies or match the offer.
- [ ] Immediately terminate the original contract.
- [ ] Request more earnest money from both parties.
- [ ] Consult with their lender.
> **Explanation:** The seller must notify the current buyer, giving them the chance to waive their contingencies or match the offer, before terminating the existing contract.
### What can trigger the activation of the kick-out clause?
- [x] The receipt of a better offer from another buyer.
- [ ] An increase in the property's market value.
- [ ] The first buyer failing to make a mortgage payment.
- [ ] The original buyer requesting more time to close.
> **Explanation:** The activation of the kick-out clause is typically triggered by the receipt of a better offer from another buyer.
### What is often required from the first buyer to avoid their agreement being kicked out?
- [x] Removal of contingencies.
- [ ] A reduction in the purchase price.
- [ ] Acceptance of additional inspection periods.
- [ ] Participation in a bidding war.
> **Explanation:** The first buyer is usually required to remove contingencies to avoid the agreement being kicked out.
### What type of offer often includes a kick-out clause?
- [ ] Non-contingent offer
- [x] Contingent offer
- [ ] Cash offer
- [ ] Seller-financed offer
> **Explanation:** Contingent offers often include a kick-out clause, particularly when the contingency involves the sale of the buyer’s existing property.
### Which party typically initiates the inclusion of a kick-out clause in a contract?
- [x] The seller
- [ ] The buyer
- [ ] The real estate agent
- [ ] The home inspector
> **Explanation:** The seller typically requests the inclusion of a kick-out clause to maintain market flexibility and protect their own interests.
### When is a kick-out clause unnecessary in a real estate contract?
- [ ] When the market is very competitive.
- [x] When the buyer has no contingencies in their offer.
- [ ] When the seller needs to sell urgently.
- [ ] During the peak season for home buying.
> **Explanation:** A kick-out clause is unnecessary if the buyer's offer is non-contingent as the seller is then not waiting on the buyer’s ability to sell another property first.
### Why might a buyer agree to a kick-out clause?
- [ ] To increase the purchase price.
- [ ] To make the inspection period shorter.
- [ ] To delay the closing date indefinitely.
- [x] To make their contingent offer more competitive when attractive terms are presented.
> **Explanation:** A buyer might agree to a kick-out clause if it increases the competitiveness of their offer, particularly in a multiple-offer situation.
