Q: We were about to sign a contract to sell our house to a very nice couple when they advised us that they cannot afford to buy our house unless they sell their house first. We would like to sell to them, but are reluctant to take our house off the market for an indefinite period while they try to sell their house. How do you resolve this dilemma? A: There is a concept in real estate called "the kick-out clause," which may solve your concerns. No one likes to sign contracts that are contingent on the buyers' ability to sell their own house. But not everyone can afford to buy a new home without selling their current one. And even if you can afford to carry the financial burden of two houses, many prospective home buyers still prefer to include a contingency in their contract to the effect that they do not have to purchase the new property until and unless their current home is sold.
Generally speaking, when buyers present sellers an offer to buy, they can include a contingency for the sale of their house. This is known as a "contingent contract." This means that if the specified event does not occur -- in this case the buyers do not sell their house -- the contract to purchase the new property becomes null and void and the purchasers are entitled to a full refund of any earnest money deposit.
And, sellers do not want to take their house off the market for an indefinite period.
Accordingly, a compromise has been developed, which is known as a "kick-out" clause. Under this arrangement, the contract provides that while the sellers are willing to accept a contingency contract, the sellers will continue to market the house. If another qualified buyer is found, the seller will give the current purchaser a certain amount of time -- usually 72 hours -- in which to remove the contingency (that is, keep the contract alive) or exercise the contingency and decide not to buy the new property.
This kick-out clause has to be carefully drafted. If the potential purchasers are confronted with the 72-hour kick-out period, and decide to remove the sale contingency, they still may be able to get out from under the original contract if they cannot get financing. Keep in mind that most standard sales contracts also contain another contingency on the ability of the buyer to obtain the necessary financing.
This creates a dilemma for both parties. If the purchasers remove the sale contingency but still have the financing contingency in the contract, it is likely that a lender will not give a binding loan commitment to the purchasers unless they sell their house first. Thus, the mere removal of the sale contingency does not meet the seller's needs. The purchaser still can find an excuse to back out of the contract, based on another contingency in the contract.
Thus, sellers should include, at the very least, the following language in the 72-hour kick-out clause: "The parties agree that sellers' property shall remain on the market during the above contingency period. If the purchaser does not remove the above contingency and provide evidence satisfactory to seller in their discretion of ability to perform under the terms herein within (a specific number of) hours after receipt of written notice that seller has accepted a secondary contract, purchaser's deposit shall be promptly returned in full."
Under this contractual arrangement, the potential purchasers have the right to delete the contingency and go forward with the purchase. But the purchasers also have to demonstrate, to the satisfaction of the seller, that they are financially able to qualify for the loan. In many instances, the purchasers will not be able to satisfy this requirement, because they obviously do not have the funds to have mortgages on two houses at the same time.
From the sellers' point of view, this is acceptable. Although the sellers have signed a contract, in effect they are keeping the house on the market. The sellers have the right to continue to show it to other potential purchasers, and have the right to take backup contracts. If you are dealing with a realty agent, insist the agent continue to market your house even after you have signed the first contract.
From the buyer's point of view, the 72-hour kick-out also is an acceptable compromise -- but obviously is subject to abuse. Buyers can appreciate that a seller will be reluctant to take the house off the market when the contract is subject to a selling contingency. On the other hand, if a seller obtains a higher price for the house from a third party, the seller has the ability to be arbitrary by using the excuse that the current purchaser is not financially able to purchase, thereby giving the seller the right to sell to a third party.
The 72-hour kick-out clause is a compromise for both parties, and has become an acceptable practice in the real estate arena. However, sellers also should insist that the buyers immediately begin to market their own property -- whether through a real estate firm or on their own. Specific language should be included in the contract that if the purchaser does not begin to market the property within a reasonable period of time -- for example, five days after the first contact is signed -- then the seller has the right to void the contract and look for another buyer.
Careful drafting is mandatory when buyers and sellers are considering signing a sales contract. Even form contracts should be reviewed carefully because a form obviously cannot cover all possible situations. Once all the parties put their signatures on the piece of paper called a "real estate sales contract," it becomes legally binding on both sides. Thus, it is important to completely understand all documents you sign -- before you sign. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036.