One component of investment strategy involves securing a property under contract, and then assigning those contract rights to another investor. Sounds simple, right? Well, there’s good news and bad news. The good news is that this operation IS simple, if you do it right. But that can be a big IF, fraught with potential mistakes. Here are a few things that need particular attention:
1. Make Assignability Clear.
Of all the contract terms between you and a seller, this is one of the most important. Prior to 2010, doing this was easy: investors could write in “John Doe and or Assigns” as the purchasers, and all was well. However, banks started seeing this clause in REO property purchases and considered it a red flag. Why? The answer is in the difference between homeowners and investors. With the “bashing” many investors have experienced in the past, a generic term like “assigns” may make a seller balk.
Fortunately, that problem is easily solved: write the agreement with a trust or an LLC as the purchaser. Utilizing an entity in this way enables you to assign “it” to another investor, but the contract rights and responsibilities are with the entity…not an individual. If you do this with an REO, make sure all earnest money comes from the ENTITY’s account, not an individual’s.
A couple of additional caveats apply to this approach:
- If you as the investor plan on getting financing, you’ll need to assume the “buyer” role as an individual. Banks typically don’t lend on property held by an equity.
- If you don’t plan to use the entity route, then include a specific provision in the contract that spells things out: that you, as the buyer, are a real estate investor, and that you intend to assign the contract to a new buyer. In your negotiations, make sure the seller initials or signs off on that provision; this reduces the likelihood of the seller objecting or reneging down the road.
2. Get the Assignment Agreement In Writing.
Whether you’re assigning the contract to an investor or selling the entity that holds contract rights, ALWAYS get the assignment agreement in writing.
What should the assignment agreement contain?
- A reference to the property covered in the contract.
- A clause attesting that the assignor makes no representations and/or warrantees regarding either the agreement or the property involved, and that further, the assignee is entering into this agreement after independent investigation of both the property and the agreement.
- A separate acceptance provision, worded something like this:
Investor, as Assignee, hereby accepts the above and foregoing Assignment of Contract dated XXXX, XX, 20XX by and between Assignor and ____________________ (seller) and agrees to assume all of the obligations and perform all of the duties of Assignor under the Contract.
- Language that covers earnest money — i.e., that the assignee will reimburse you the money you pay up front. This protects you (and your money) against breach of contract, and should be due to you upon assignee’s acceptance.
- Specific dates and terms dealing with your assignment fee. Beware of having it paid out of escrow; typically, lenders object to this fee. If the assignee has a problem with paying this upon acceptance, have it paid INTO escrow.
N.B.: This provision needs to be worded carefully so that, even if the deal fails because of actions by assignee or failure to close, you will still receive the fee. Included in this wording should also be protection for you against a seller’s breach of contract. If the assignee brings an action to enforce performance upon filing, your fee needs to be considered “earned.”
Do not structure anything in the agreement as a “Finder’s Fee.” A finder’s fee agreement is very different from an assignment.
- A provision that the seller will be notified of the assignment.
3. Notify the Seller.
Provide notice of assignment to all parties promptly so that once the assignment is done, all communications are done with the assignee from that point on.
One Final Word to the Wise
If you cover these important points in the assignment, you should avoid many of the common pitfalls. That being said, you never know how good a contract is until it’s tested in court! For that reason, I also advise you not to be tempted by the “do-it-yourself” approach of downloading forms from the Internet or through a seminar. The more prudent course of action is having an attorney draft you an initial contract; you can then use a form of it for subsequent transactions.