ASSIGNMENT CONTRACTS 101
Assignment contracts are very popular with investors. This topic is definitely for newer investors or even for realtors who are starting to work with investors. If that sounds like you, continue reading!
In the world of real estate investing, you’re going to encounter contracts that are called “assignment contracts”. Assignment contracts are used, when an investor goes under contract with a seller to buy the Sellers’ property and then, the Buyer takes their RIGHTS to buy and assigns those rights via an assignment contract to a new buyer. They will say, “I am going to assign this” or “ I am going to wholesale” this. That’s when you know to be ready to work on an assignment transaction. The Original Buyer or the Assignor usually takes a fee at closing for “finding” and assigning the property to the new buyer.
Assigning a contract is not the same as selling a property or brokering a property. You’re not selling a property. You cannot do that because you cannot sell something that you don’t own. You’re just transferring your rights and you, the original Buyer, becomes the “middleman/woman”.
If you assign your contract, your new buyer will step into your shoes as the buyer under the same terms that you’ve negotiated with the seller. So the parties are:
- The Seller
- Middle Man (you) and
- The End Buyer.
The End buyer will perform the inspection and due diligence and they will bring the money to closing.
It’s important that both you and the end buyer are represented by an attorney and you each have to have your own attorney.This way, you can police the behavior of your end buyer. Also, your attorney is likely to be the one communicating with the Sellers’ Attorney.
End buyers back out all the time. When you’re assigning a contract, the Seller doesn’t often know it, so if your end buyer backs out, you could still be on the hook to buy the property, so you definitely need an attorney protecting your interest.
Are assignment contracts legal?
Yes, they are. There are statutes that say that assignment contracts are legal. Even though they are legal, there are contracts that prohibit assignments OR only allow assignments with the Sellers’ consent. So, the contract you sign with the Seller is very important. You’ll have to look at the terms and see if there is a clause precluding assignments. If so, you’ll need to negotiate this term before you sign the contract with the Seller.
TIP: If you’re in New Jersey, the New Jersey standard realtor form contract has a provision in it that states that this contract is only assignable upon the consent of the seller. So, if you were planning to assign your rights from a NJ standard realtor contract, you will need to negotiate this during Attorney Review with your Attorney. If you’re not using the realtor contract, you can have your attorney draft your own contract with the seller and they can add the assignment provision in so that it is already there and clear that you have the right to assign it.
Now there are certain circumstances where assignment should not be used and that is in the case of buying a property that is a short sale. I highly recommend staying away from assigning those transactions due to certain prohibitive federal regulations.
I hope this article helps you get a better understanding of Assignment contracts. Thank you for reading.
This post is for educational purposes only and is not intended to be legal advice. No Attorney Client Relationship is formed by your reading of this article.