Out clauses are different things to different people. To a Buyer they are a safety net to a Seller they should be a red flag. What is an out clause and why are they in my contract? Simply put an out clause is something a Buyer might put in a sales agreement that would allow them to get out of the agreement and keep their deposit. A Buyer may really want your home but they may still put in an out clause just in case they find another property they like better before closing yours. A buyer may put a couple of these in their agreement hoping you find one but not all. They also may put one of these in an agreement so they have something to give up again hoping you don’t find something else that is important to them. There are any number of these clauses that you may come across I will tell you about the three we see most often.
Mortgage Contingency Clause. This clause simply says that the agreement is contingent upon the Buyer getting a mortgage for your property under these terms and conditions. How this clause works is that a smart buyer will put in terms that they know they can’t get. So six weeks down the road they find a house they like better, they say that they can’t get a mortgage under those terms and the deal is deal and you must return their deposit. Meanwhile you have had your home off the market for six weeks and possibly have already made plans to move. If they don’t find a different home they have the option to close under whatever terms the lender gives them.
Inspection Clause. This clause simply states that the Buyer has the right to have the property inspected with the results being satisfactory to them. This is now a standard clause in most Florida Sales Agreements. How this works is the Buyer has a time frame in which to have the property inspected. Up until that date they don’t even need to give you a reason on why they are canceling the agreement. They can simply put their wishes in writing and you must return their deposit. Sellers the best way to protect yourself here is to limit the time you give them. Never give them more than 15 days and keep your property on the market for back up offers until that date has passed.
Due Diligence Clause. This simply means they want to research something. They may want to check on some zoning issue to see if they can make changes to the property of have a business on site. Again this has a time frame and depending on how it’s written the Buyer may or may not be required to even give you the reason for canceling the deal under this clause. Again don’t allow more than 15 days and keep your property on the market for back up offers.
One last tip, watch for Assignment Clauses. This allows the Buyer to sell or assign their rights under your agreement.. This can put you dealing with a different person altogether. This is important because they don’t have time frames. So a Buyer can wait to the very end and assign their rights to a person that now can’t qualify for a mortgage and your deal is dead.
With these clauses if you are willing to accept this term make sure that you have the right to approve the person they are assigning to.
A good Realtor will catch most of these, However, in the real world there are thousands of new Realtors that won’t. This is why you always want your Attorney to look over a sales agreement. If you have any questions on out clauses you can contact me personally at [email protected]
F. William (Billy) Hineline
Resident Real Estate Expert and Contributor
President FWH Professional Group