Real Estate Purchase Contract Assignment Clause

A purchase contract with an assignment clause or addendum is a legal sales activity where the purchaser of a property sells their rights and obligations to another buyer with the sellers consent.

The final buyer assumes all of the original buyer's duties and obligations under the original purchase contract. This includes provisions for deposits, included items and final sales date. Upon completion of closing and when legal transfer of Title has occurred, the final buyer is granted Title to the property.

See: Assignment to purchase contract calculator

How Does A Purchase Contract Assignment Work?

Let's examine how an assignment deal might work. You find a property and put it under contract to purchase it from the seller. In the purchase contract, you negotiate the right to assign the contract. Then, once you find a buyer, you fill out an assignment of contract, collect your fee and help facilitate the closing with the seller and final buyer.

Assignment Example:
You find a property with a purchase price of $110,000 that is worth $180,000. You also feel that there are $10,000 in upgrades and repairs, which leaves an equity position of $60,000.

Typically, you will have spent a lot of time, money, and expertise to find a bargain, negotiate the terms, and get the property under contract. By putting the property under contract, you now have control of the property and the equity in the property.

You find another party that recognizes your equity position of $60,000 and strike a deal to sell them your position in exchange for an assignment fee of $10,000. So, you give up your obligations and rights to $60,000 in potential profit for $10,000 current profit.

This new buyer pays you before closing at the time you assign or sell the contract to them. If the new buyer pays you to little up-front or at closing (sometimes classified as a fee to clear title), they may lack the enthusiasm to perform.

Assignments in New Residential Developments

Opening and closing sale opportunities exist for those who have the timing, or patience to time their purchase with the developer or builder needs. A typical developer will pre-sale some of the lots in a new subdivision or phase to builders for model homes and custom homes. Some lots are sold at wholesale volume discounts to builders who then, offer reduced sale prices to generate buying activity.

Builders will sometimes use an assignable contract when a property is not yet completed and the person that bought it originally is unable to close the transaction. If the property value has gone up and is worth more, the builder may benefit with an assignment at current market value. This typically works with new construction, when it can take up to a year before the house is built and the sale is closed.

Assignment Example:
Assignor enters into a sales agreement to purchase a lakefront lot for $100,000 from a developer as a pre-sale in a new phase. Assignor pays a total deposit of $25,000 with the remaining $75,000 due in three months.

Two months later Assignor decides to sell, and thereby transfer, contractual rights and obligations to purchase the lot for $20,000.

Assignee missed the chance to purchase a lot when the developer was pre-selling. The phase is now sold out. Assignee wants to purchase Assignor's rights and obligations for the asking price of $20,000.

Assignee pays to Assignor $20,000 plus replacement of the deposit of $25,000 which equals a total of $45,000.

When the original closing date transpires, Assignee owes the developer the balance of the sales agreement which is $75,000 (original price less original deposit).

Assignments in Pre-Construction Condo Developments

Through additional new phase price increases and/or appreciation, equity from a pre-built home purchase may build-up. When a new home or condo is reserved with an initial deposit or letter of credit, the profit may be substantial. How much profit can be made at or near completion? It depends on purchase price and market demand. There is no guarantee of profit. However, substantial gains may be realized. Profits can run from 5% to as much as 25% or higher per completed new condo.

Two factors may work in your favor when reserving pre-construction of a new condo or home. (1) Subsequent releases rise in price based on demand. With each additional phase release a 1-3% increase in prices is typical. (2) The longer a home takes to be built, the more appreciation is possible without having a mortgage obligation. If you reserve a $250,000 home with an initial deposit of $10,000 you see an increase in the home value of $625 for every month the project takes to complete, assuming a 3% appreciation rate.

The process of purchasing a new home or condo in the initial sales release or development phase to assign it later requires attention to four important steps.

Step 1: Get to know the different builder, lender and title representatives to find out about their services and policies. The builder, lender or title company may or may not allow you to assign your rights to sell the home prior to it being completed. Read the contract carefully, review all the terms, conditions, provisions, disclosures, and addendums with an attorney and ask questions before signing.

Step 2: Buyers select a pre-constructed home, sign a reservation agreement and get pre-approved by a lender. The buyers put down a deposit which is fully refundable. However, the builder can also back out during this Step or change the sales price.

Step 3: A purchase contract is drafted and a binding agreement between home builder and buyer is made. Buyers typically have a right of refusal rescission period once the contract is signed. At this Step deposit monies may not be refundable. So, be sure to add contingency clauses such as, for the sale of a previous home or attorney review.

Step 4: From the time of the buyer’s initial reservation and deposit, completion of the new home could take up to twelve months. Once the home is complete, closing in escrow is much like a traditional purchase. At this Step, buyers must pay any remaining closing costs and deposits. If buyers elect not to close, any money deposited as the initial down payment will be forfeited. Also, there could be a loss of fees or closing costs paid.

Some Advantages of an Assignment

Small initial investment, typically 1-3% of the total purchase price to control a property.

Since you are not actually closing on the property yourself when you assign it, you don't need to get a special license, a loan, pay transaction fees, pay real estate agent fees or have the cash to purchase the property. And, another benefit is that you never appear on title or public records as having owned the property.

Pre-construction homes and condos are typically offered 10-20% under market value. Similarly, development grand opening and builder close-out sales often reduce prices. With an abundance of re-sale homes, foreclosures and bank REO's there are deals everywhere, which means you often build equity upon the purchase of a home.

Having the ability to choose from the best homes, locations, pricing and financing available gives more choices and achievable return on your investment.

Possible Problems with an Assignment

Lenders are getting very conservative about the loans they are doing. They won't always let you do an assignment of contract because of the unfamiliarity of the new buyer. You may find that the lender will turn it down after it's sent in. When this happens the lender may say that they will only put the name of the person on the original property agreement on the new deed. Without the ability to get the contract assigned, you may have to do a double closing or simultaneous closing.

A seller’s financial condition could affect a closing if there are judgments pending. An insolvent buyer’s problems could affect his ability to get financing or close. A buyer or seller filing for bankruptcy does not doom a sale, but it surely complicates it.

Title companies have been known to limit an assignment fee to 30% of the sales price or they will not insure the policy.

If you accept only a small assignment fee, you are setting yourself up for a possible failure. If buyers don't have enough cash in the deal to prevent them from not closing, you end up not only with a damaged reputation, but you have lost the contract on the property. If the buyer is unable to perform, the responsibility for the contract is still in your hands as you have signed a legal contract to purchase the property.

Some sellers won't go along with an assignment because they have read about what dishonest people have done. They are afraid you will tie-up their property and won't be able to complete the transaction.

In many cases, the buyer and seller each know how much is made assigning the deal. For some people this can be an issue, especially if the amount is considered large. You can try to work with a title company to have separate HUD statements but, some may do this while others will not.

Comparable values in a neighborhood can greatly effect a property valuation. Therefore, Builders, lenders, real estate agents, and homeowners usually want to limit the amount investment property versus the owner occupancy property ratio in a development.

Real estate agents aren't particularly fond of assignment deals because they're services are not necessarily needed.

What information is necessary in An Assignment of Contract?

Since you will be assigning the purchase agreement to an end buyer, you need to insert the right to assign the contract. If the agreement does not state otherwise, a contract is usually assignable. However, by placing “and/or assigns” after your name, you give yourself the right to assign the contract. If, however, there is a pre-printed clause in the agreement that forbids this without the seller’s permission, be sure to cross that part out and have it initialized by you and the seller.