The release clause, also known as a buyout clause is a contract provision that allows for the freeing of all, or part of a property, through a proportional or full amount of the mortgage being paid. This clause is usually seen in blanket mortgages.
A clause identifies a particular section of a real estate contract (for those of you who don’t know). There are many types of clauses in real estate, and you are likely to see many of them on your real estate exam.
What is the Release Clause?
Definition: A release clause is a contract provision (typically in a blanket mortgage) that allows for the freeing of all or part of a property from a claim through a proportional or full amount of the mortgage being paid off.
So what does that mean? Well, those of you who don’t know blanket mortgage are mortgages that cover two or more real estate pieces. Blanket mortgages are designed to enable investors, builders, and developers to mortgage more efficiently. Within a blanket mortgage, investors place multiple properties under a single loan, which is much more efficient than having various single property mortgages.
The release clause allows investors to pay off a specific portion of their blanket mortgage to fully release it of the lender’s claim. In other words, investors can pay off their blanket mortgage property-by-property rather than only being able to pay it off in one lump sum.
Release Clause Example
Here is a quick and easy example. Imagine there is a mortgage agreement for a subdivision. This investor has ten properties within his mortgage agreement. Because his blanket mortgage has a release clause, he pays off two of the ten properties and now owns two of them outright.
What to Know for the Real Estate Exam
What’s important to understand for the real estate exam is like other clauses, you need to remember what the release clause is.
Remember, the release clause allows for the freeing of all or part of a property from a claim through a proportional or full amount of the mortgage being paid off.
A question on the exam you might see is a list of different contract clauses, and you may need to distinguish which-is-which.