Mat Sorensen is a partner with Kyler, Kohler Ostermiller & Sorensen in Phoenix. You can reach him at: firstname.lastname@example.org.
Assigning another party to take over a transaction from you before it closes can be smart. Be sure you do it right.
May - June
Investors eyeing foreclosures and other residential properties to flip often connect with other investors looking for opportunities in the single-family rental market. Contract assignments are a common tool in these kinds of transactions because they enable investors to get a property under contract quickly and, rather than assume the risk that comes with turning it into a long-term investment, turn it over to an end buyer before closing in exchange for a fee.
It can be a win-win for all involved. Sellers get buyers, buyers get properties they otherwise might have missed, and investors can make money without having to assume ownership risk. If you’re thinking about getting involved in these deals, either by representing investors or acting as an investor yourself, knowing best practices in contract assignment can reduce your legal exposure.
Of course, any investor you work with should consult an attorney to ensure the contract assignment is handled correctly. And if you’re the investor, you’ll want to have a trusted legal adviser on hand as well. As a licensee, you should not draft addendums or try to create an assignment by modifying the form contract, because both of these activities likely constitute the unauthorized practice of law.
Right to Assign
First, make sure the purchase agreement with the seller gives the investor the right to assign the contract without consent of the seller. Most standard form purchase agreements don’t have that built in, so the agreement should either be amended or have a rider added to give the investor the right to act unilaterally. A common term would be, “Buyer has the right to assign this agreement without the approval or consent of Seller.”
Along with contingency clauses you would find in any sound agreement, you want to make sure the purchase agreement contains provisions that apply when a contract assignment is involved.
These include 1) giving the end buyer—not just the investor—the right to enter the property to have it inspected, 2) making the term of the agreement 45 to 60 days rather than the more typical 30 days so the end buyer has time to inspect the property, and 3) allowing the agreement to terminate if the investor or end buyer finds major issues and doesn’t want to buy.
Contract With the End Buyer
As the relationship between the investor and end buyer makes clear, these deals really involve the investor in two transactions, one with the seller and one with the end buyer.
So, be certain there’s a separate contract, often called an assignment agreement, between the investor and the end buyer, so each party knows who’s responsible for what.
For example, what happens if the end buyer can’t perform as promised? If the deal collapses and the earnest money put up by the investor is forfeited, will the end buyer pay the investor back or does that risk stay with the investor?
If, as a licensee, you’re acting as the investor with the intention of assigning the contract to an end buyer for a fee rather than as an agent for the investor, make sure you disclose that to the seller clearly and up front so there’s no question over your role.
If, again as a licensee, you sign the purchase contract but don’t have an end buyer already lined up, make sure any marketing you do to attract an end buyer gives a true picture of what you’re selling. You’re selling rights to the purchase contract, not the property itself.