Editor's Note: Originally published on October 27, 2003.
Question: Although we are being told that this is a strong real estate market, our house has been on the market for some time. Finally, we received an offer from a nice couple, but unfortunately, they cannot afford to buy our house unless they sell their house first. We would like to work something out with this couple, but are concerned about taking our house off the market for an indefinite period while the buyers try to sell their house. How do you resolve this dilemma?
Answer: While no one likes to sign contracts that are contingent on the purchasers' ability to sell their own house, unfortunately it is now a fact of life that must be recognized by every buyer and seller. With house prices having increased dramatically during the last few years, more and more buyers find that they can only qualify to buy a more expensive house if they first sell their current residence.
Generally speaking, when buyers present an offer to purchase, they can include a contingency for the sale of their house. This is known as a "contingent contract." In simple English, this means that if the specified event does not occur -- in this case the buyers do not sell their house -- then 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.
Needless to say, as you have suggested, 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 sellers add language to the real estate sales contract stating that while they are willing to accept a contingency contract based on the purchasers' selling their current house, the sellers will continue to market their 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 (i.e. keep the contract alive) or exercise the contingency and decide not to purchase 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 delete the sale contingency, they may still be able to get out of 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 purchaser 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 probable 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 can still 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 any 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 sellers in their sole discretion of purchaser's 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, and this contract shall be null and void.
Under this contractual arrangement, the potential purchaser has 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 the seller, because they obviously do not have the funds to permit them to go forward with the purchase.
From the sellers' point of view, this is an acceptable arrangement. 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 back-up contracts if possible.
If you are dealing with a real estate agent, insist that the agent continue to market your house even after you have signed the first contract.
From the buyer's point of view, the kick-out clause is also an acceptable compromise -- but obviously is subject to abuse. The buyer can understand that a seller is 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 kick-out clause is a compromise for both parties, and has become an acceptable practice in the real estate arena.
However, the sellers should also insist that the buyer immediately begin to market their own property -- whether it be 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 5 days -- then the seller has the right to void the contract and look for another buyer.