It's not accepted because nobody put that sentence into the possible correct answers. Report it, that's the only way it will get fixed.

I wrote the exact same thing as you did (we are looking out onto the street) and it was still not accepted. reported it again.

Exactly. "de" is the simple "but" while "hanem" is "but rather".

De is the simple "but".
Hanem only appears in comparisons: "Nem [x], hanem [y]."

Nincs is what happens whenever you would write nem van, and you always need to include van when speaking about where something is (or when, for that matter, those are adverbial constructions).

So you have multiple possibilities for the second clause, depending on what aspect you want to negate:

• de ő nincs ott - just means "he is not there". You expected him, but he sadly hasn't come yet.
• de ő nem ott van - That's what people would understand when you say "de ő nem ott". That means "he is not there, on the street, but.. right behind me, for instance". Your listener would expect you to clarify where he is instead.
• de nem ő van ott - "It is not him who is there." You expected him, but instead you find someone else on the street as you look out.

You see, whenever you want to negate a certain aspect, you put the nem in front of that aspect, and the van right behind. If you just want to note the absence, you use nincs, which is the negation of van itself.