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.
- A clause stating that Assignee agrees to hold Assignor harmless, defend and indemnify Assignor from and against any and all claims, liabilities, losses, costs, damages and/or expenses associated with the Agreement and/or the Property incurred after the Effective Date.
- The agreement contain a separate Acceptance Provision that states something similar to the following:
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.
- The agreement should contain language that deals with earnest money i.e., the Assignee will reimburse you for the money you paid up front. You do not want the Assignee to breach the agreement, which would result in you losing your earnest money. This should be due to Assignor upon acceptance by Assignee of the contract.
- The agreement should deal with when you are entitled to your assignment fee. Do not have the fee paid out of escrow because lenders will typically object to this fee. If the Assignee is reluctant to pay your fee upon acceptance then have the fee paid into escrow. Careful wording is important here to ensure that you will receive your fee if the deal falls apart because of Assignee’s actions or inability to close. Also, take into account seller’s breach of the contract. If Assignee brings an action to enforce performance upon filing, your fee should be considered earned.
- Do not structure the agreement as a “Finder’s Fee”. As I stated last week, a finder fee agreement is very different from an assignment.
- Include a provision that Seller will be notified of the assignment.
Notify Seller. Provide the notice of assignment to all parties involved so everyone communicates with the Assignee henceforth.
These are some of the more important provisions I believe should be included in any assignment. As with any contract, you never know how good it is until you are forced to test it in court. My advice as always is to avoid forms you purchase over the internet or from seminars and have an attorney draft you an initial contract that you can use for future dealings.