Last week’s post focused on Finder Fees as part of an overall wholesaling strategy. Another component to this strategy involves securing a property under contract then assigning the rights of that contact to another investor. Sounds simple enough and it is provided you structure it the right way from the outset.
Assignability. This is by far one of the most important terms in your contract with the seller. In the past, most investors would simply put “John Doe and or Assigns” as the purchaser under the contract. This worked up until 2008 when banks started objecting to this clause in contracts to purchase REO properties. When dealing with individual homeowners this may not be an issue, however, with the bashing that investors have experienced, such a clause may make a seller uncomfortable. A solution to the problem posed by “and or Assigns” is to write up your agreement with a trust or LLC as the purchaser. By utilizing an entity you have the ability to assign “it” to another investor and the contractual rights under the contract run with the entity not the individual.
- If dealing with a REO all earnest money must come from an account held in the name of the entity and not an individual.
- If the investor is planning on obtaining financing, he should expect to move into the buyer position individually. Banks will typically not lend on residential property held in an entity.
- If you do not use the entity route, you might want to include a specific provision in your contract that clearly explains that you, as the buyer, are a real estate investor and that you intend to assign the contract to a new buyer. Have the seller initial the provision so you reduce the likelihood of a seller objecting to the new purchaser and attempt to back out of the agreement.
Written Assignment Agreement. When you assign the contract to an investor or you sell your entity that holds the rights under the contract, ALWAYS use a written assignment agreement. An Assignment Agreement should contain some of the following:
- The agreement should always refer to the property covered in the contract.
- A clause stating that the Assignor has made no representations and/or warranties regarding the Agreement and/or the Property and Assignee has decided to enter into this Assignment after independent investigation regarding both the Agreement and the Property.