Kick Out Clauses in Residential Massachusetts Real Estate Transactions

In a white hot real estate market, Sellers of residential real estate on the Northshore of Massachusetts have adopted a new contractual provision to counter a Buyers’ request for an existing home sale contingency. Typically, a potential Buyer of a residential property that presently owns another property, will be required, for financial reasons, to sell their existing home in order to purchase the replacement home. The reason is simple: Most homeowners do not want to carry the mortgage, property insurance and taxes for two homes, and any mortgage lender will require that Buyer sell the existing home to satisfy loan underwriting requirements.

Therefore, Massachusetts homebuyers that are looking to upgrade or downsize their home, will likely request that a Seller of real estate agree to a prior sale contingency. In other words, if the Buyers fail to sell their existing residence prior to the closing date or some other date set by the parties, the Buyers then may terminate the transaction and receive a full refund of their deposit.

Sellers are now countering a home sale contingency by inserting their own contingency clause in a purchase and sale agreement. A “kick out” clause will permit a Seller to continue to market the property for sale to other prospective purchasers while the property. If the Sellers receive an offer for an amount equal to or that exceeds the existing and agreed to purchase price (and no prior sale contingency), the Sellers will then have the right to demand that the Buyers waive the home sale contingency, otherwise, the Sellers may terminate the transaction. In this instance, the kick out clause will provide the Sellers an escape hatch if they are able to find Buyer for the property that are willing to pay a greater price and waive any home sale contingencies. This is not a desirable position for any homebuyer since the Buyer will not only lose the right to purchase the property, they will likely have to start the home buying search again and may lose their interest rate lock set by the lender.

If you are presently negotiating a purchase and sale agreement it is important that you retain experienced legal counsel that is skilled at limiting the scope and applicability of kick out clauses. Northshore Legal LLC has seen many poorly drafted kick out clauses that impose strict limitations on Buyers and provide the Sellers with expansive rights. These kick out clauses often appear in counter offers from the Sellers to the Buyers on Standard Offer to Purchase Real Estate forms, and are often drafted by real estate agents that have little experience in such clauses. If you received a counter offer that contains a kick out clause and require assistance with your real estate transaction, please contact one of our attorneys at Northshore Legal at 781-463-6063.

Selling Real Estate Without a Broker - Considerations and Pitfalls

With the real estate market in Eastern Massachusetts favoring sellers of real estate, we have noticed a trend and tendency of some sellers to list their property for sale by owner and avoid the use of real estate brokers all together.  The simplest explanation for this decision is cost.  Many sellers realize that they can avoid a 2.00 - 2.5% commission to a listing broker if they consummate a sale without assistance.  But what is the true "cost" and what are the disadvantages of not using a listing broker for a real estate sale? 

Statutory, Regulatory and Common Law Compliance - Real estate brokers know exactly the types of Massachusetts statutes and regulations that must be satisfied during each transaction. Real estate brokers are also trained on the various types of common law issues, such as misrepresentation or breach of contract, that can arise during a transaction. And they have been trained on how to avoid those types of common law liability. If you are not using a real estate professional, and unless you are an attorney or real estate professional yourself, you will not be able to satisfy and comply with the numerous laws and regulations associated with real estate transactions in Massachusetts. And in that instance, you are exposing yourself to liability.  

Market Valuation - What is your property worth and what purchase price can you reasonably expect to receive?  Finding the right listing price is crucial. Brokers have the skills and resources to help advise you on the realistic value of your property, and a listing price that will attract several ready, able and willing buyers.  It is common for homeowners to over estimate the value of their homes based on their own personal attachment and knowledge of the property. A broker can provide you with a neutral and experienced third party opinion on the value of your real estate.  If you list your property too low, then you are not maximizing the sale price. If you list your property too high, then you will scare off buyers, particularly the ones who are taking out a mortgage and are responsible for a 20% down payment.  In this instance, the value of a broker should not be underestimated. 

All the "little things" - Who is going to collect signatures and deposits for the purchase and sale agreement? Who will make the mandatory disclosures and obtain the required certificates for closing? Who will coordinate inspections, viewings, and walkthroughs?  Who will serve as tour buffer and advocate if your transaction enters troubled waters? Who will greet potential buyers and handle inquires at open houses? Do you have an expansive and established network in the area that you are selling your home that you can market to? This list is limited, and can very extensive, and all the "little things" that a real estate broker will do for you to ensure that you close on-time are invaluable. 

The above list is not an exhaustive description of all the benefits of real estate brokers in transactions. From a legal observational standpoint, we have noticed a trend that real estate brokers provide tremendous value in each transaction and help smooth the process until closing. If you are preparing to sell your home, and would like to consult with a real estate lawyer, please contact us at 781-463-6063.  

Concerns for the First Time Home Buyer

With the short supply of turn key "starter" two and three bedroom homes for sale in Eastern Massachusetts, first time home buyers are now faced with new pressure to quickly make an offer and get under contract as soon as possible.  It is understood that a first time buyer is eager to end the long and enduring search for a new home, however, failure to pay attention and overlook important pitfalls and traps may lead to long term issues.  

Inspections - We are hearing more and more often that buyers are willing to waive inspections and blindly accept the condition of the property being purchased "as is." Unless you are a third generation trades person or have substantial experience in inspecting and renovating residential homes, it is highly likely that you will be unable to identify some serious, and expensive, issues with the property.  Waiver of inspections solely benefits the Seller in the transaction and provides no benefit to the buyer.  If you do not have the property inspected by a certified and qualified home inspector, you could inherit serious issues such that affect the building structure, mechanical systems, or cause other problems such as pest infestation, mold, or others. 

Repair Credits - If you are waiving inspections, and are not asking for credits to allow for the improvement or repair of certain features and systems at the property, then you will essentially inherit a liability for those items after the completion of the sale. It is common for purchasers to request that the sellers provide a credit to repair or replace, for example, a leaking roof, faulty electrical panel, non-functioning oil / gas boiler, rotted eaves-flashing-siding issues, and the like.  If you are not taking a credit at closing for these repairs, then your cost of purchasing the home will increase by the cost of these repairs. 

Short Closing Window - Unless you are paying cash for your new Massachusetts real estate purchase, you should not agree to complete the sale in less than forty-five days. Your mortgage broker and/or lender will be hard pressed to complete and clear your loan to close on short notice.  Your real estate attorney, who will be abstracting and reviewing your title, will also have to place a rush order on all work, and may have difficulty obtaining all items necessary to close.  In other words, if you agree to a short deal time frame, it is entirely possible that you will have to request an extension from the Sellers. Your mortgage lender and closing attorney cannot control all contingencies that can potentially extend the deal time frame. There are limited circumstances and contingencies that allow extensions of the time for performance (deadline to close), and you may end up risking your deposit if you encounter sellers that are unforgiving and who will not agree to extension. 

These are some initial concerns for a first time home buyer of real estate in Massachusetts. Our firm represents buyers and sellers of real estate in Essex, Middlesex, and Suffolk counties, including the cities and towns of Boston, Peabody, Danvers, Lynnfield, Wakefield, Woburn, Andover, Burlington, and others.  We will update this blog article shortly with additional concerns and recommendations for the first time home buyer.  If you are purchasing a new home, please feel free to consult with us anytime at 781-463-6063. 

Issues With Mortgage Contingency Clauses in Purchase and Sales Agreements

During the drafting and negotiation of the purchase and sale agreement concerning any real estate transaction in Massachusetts, it is important to understand how your mortgage contingency clause may come into play if you are trying to sell your current residence and purchase a new residence.  Often real estate lawyers in Massachusetts are requesting a provision that does not allow a purchaser of real estate to withdraw from a transaction without penalty if a mortgage commitment contains a condition that an existing residence be sold prior to the purchase.  The clause will often read as follows: "The BUYER understands and agrees that rejections for mortgage financing on the basis of the unsold status of his/her present home will not be a reason to terminate Agreement pursuant to the mortgage contingency."  This provision can create substantial issues for a purchaser as the deadline to close rapidly approaches. 

It may be that a lender will not issue at mortgage commitment due to the fact the buyers have not sold their present residence.  In this instance, under the terms of above clause, the buyers will not be able to terminate the agreement pursuant to the mortgage contingency under this scenario. It must be for an entirely different reason other than failure to sell a present residence.  

Although a lender may issue a mortgage commitment, it may contain a condition that the buyers must close the sale of their existing home prior to loan approval or consummation of the purchase of the new property.  This will create a timing issue with the transaction; now the buyers are acting in two different roles (as buyers and sellers), and relying on two separate lenders to finance two separate transactions.  This situation involves a high amount of stress on the homeowners as well as puts deposits at risk, and may involve a temporary move to a hotel until the completion of the purchase.  

To avoid the severity of this clause, it should be disclosed as early as possible (preferably in the offer to purchase) to the sellers that you currently own a property that is presently for sale, and request a prior sale contingency. The timing of the sale of your residence and new purchase can also be adjusted, and you may have to consider a transitional period between your two homes.  If you are concerned that your offer will be rejected with a prior sale contingency, you should speak with a qualified real estate lawyer about carefully crafting the mortgage contingency provisions in your purchase and sale agreement.  

Before You Overbid Listing Price and Waive Inspections on that New Home...

It is a little known secret that the residential real estate market in Eastern Massachusetts, particularly the Greater Boston area, is a Sellers' market.  There is a shortage of turn key homes at affordable prices and, at the same time, mortgage interest rates have been climbing slowly.  The prices of residential homes, particularly in the "starter home" category, in the $300,000 - $400,000 range continue to rise.  And with a healthy economy in Massachusetts, and a vibrant job market, the demand for real estate also continues to rise steadily.  

Our Lynnfield real estate lawyers have made numerous observations concerning potential home buyer's decisions while making a new offer to purchase a single family home or condominium. In an effort to make a more compelling offer to purchase that will be accepted by the sellers of the home, buyers are electing to waive inspections and are offering prices that exceed the listing price. Our real estate attorneys, who typically begin representation during the purchase and sale agreement, have reviewed numerous offers whereby buyers demonstrated that they have made aggressive efforts to secure the right to purchase a home. But at what cost?

Before you overbid the listing price on a residential property in Massachusetts, it is important to consider the possible results of your overbid.  If you are borrowing from a mortgage lender, that company will conduct an appraisal of the property to ensure that there is sufficient equity in the property to secure the lender's mortgage.  Lenders will also want to see a lower loan to value ratio (LTV) that averages 80.00% (Check with your mortgage broker for specific requirements).  In other words, the amount that you are borrowing should be 20% less than the purchase price.

If you are overbidding the purchase price of a home, and do not have sufficient cash on hand to achieve an average 80.00% LTV ratio, you may: 1. Not receive a mortgage commitment, or be denied financing that may put your deposit at risk depending on the language and timing the mortgage contingency clause in your purchase and sale agreement.  2. Receive a higher interest rate from your lender, which means that your overall cost of borrowing the funds will increase and so will your monthly payment. 3. You may have to purchase private mortgage insurance (PMI), which will increase your monthly payment and the overall cost of borrowing; and/or 4. You will be scrambling to pull together additional cash proceeds so that you may close the transaction.  These are less an ideal scenarios, and it is recommended that you remain in close contact with your mortgage broker and real estate lawyer when you are considering an overbid on a property.  

Our real estate lawyers have also noticed that many potential purchasers of real estate are waiving inspections.  In other words, the inspection contingency clause contained in the offer to purchase has been stricken and waived.  When in effect. this clause makes the transaction contingent on the buyer's satisfactory inspection of the property, which is usually conducted by a certified home inspector.  These inspections can reveal potentially expensive and critical defects in the structural, electrical, plumbing, mechanical, heating and air conditioning systems, as well as other features of the property.  It is not recommended to waive property inspections (even with new construction) and this appears to be an imprudent concession by a potential buyer who is making one of the largest financial investments during their lifetime.  

If you are a potential buyer or buyer of real estate and require assistance with your offer to purchase or purchase and sales agreement, please contact one of our real estate attorneys at 781-463-6063.  We provide all real estate legal services throughout Eastern Massachusetts.