World Wide Property Sales
Getting Around The Non-assignability Clause!
by Steve Cook
When I first started investing, contracts to purchase REO properties from banks
were still assignable. Whenever I wholesaled a property, I signed a simple,
one-page Assignment of Contract with my buyer which assigned my buying position
in my contract with a bank to my buyer. Effectively, my buyer (the assignee)
stepped into my shoes and closed the deal.
As more and more banks were burned by assignees who bought positions in their
sales contracts but did not perform, they decided it was time to start to
control the selling process and force the original buyer on a contract to
purchase the property. Thus, they started inserting a “Non-assignability Clause”
in their contracts, which goes something like this:
"This Contract may not be assigned without the written consent of Buyer and
Seller. If Buyer and Seller agree in writing to an assignment of this Contract,
the original parties to this Contract remain obligated hereunder until
settlement.”
Since I was making a living by wholesaling houses, the non-assignability clause
was a major thorn in my side. It was preventing me from closing deals, costing
me money in the form of additional closing costs resulting from double (a.k.a.
simultaneous) closings, and causing all kinds of headaches, often as we were
approaching our closing date. Whenever I bought properties from private parties,
the non-assignability clause wasn’t an issue, but the majority of properties
that I purchased were sold by banks or by HUD, neither of which allowed buyers
to assign their contracts.
As I like to keep my life simple and the clause was making my life complicated,
I had to find a way around it. So I resorted to stealing...an idea, that is. I
took a cue from the commercial real estate industry. As it so happens, in order
to avoid paying the substantial transfer taxes which result from the sale of
large, multi-million dollar commercial projects, buyers frequently request that
sellers deed their property into an LLC (limited liability company) and then
purchase the LLC. Upon discovering this, I figured if this worked for commercial
real estate buyers, it could work for my buyers.
I decided that if I purchased my properties within an LLC, I could sell my LLC
to my buyer instead of assigning my contract to them. As far as the sellers were
concerned, the buyer (the LLC) on their contract remained the same. For example,
I would submit an offer to purchase a property at 345 Harford Rd., making my
offer in the name of 345 Harford, LLC. Then I would talk to my wholesale buyers
about this property, offering to sell them 345 Harford, LLC as opposed to
selling them the property. Their incentive to buy the LLC was the reduced
purchase price that I could offer since I would save money on closing costs by
avoiding a double closing (one closing from the bank to 345 Harford, LLC and
another from 345 Harford, LLC to my buyer). If my buyer agreed to purchase the
LLC, which in turn owned the contract to purchase the home, they would arrive at
settlement and sign as owner of 345 Harford LLC.
In terms of compensation, I sold an LLC to my buyer for whatever my assignment
fee would be, which I could collect in several different ways. If my buyer were
paying cash, sometimes they would just cut me a check for my assignment fee.
Then I would hand them the LLC documents, sign everything over to them, and our
deal was done. In the event the bank seller could not produce clear title, I
would need to return the assignment fee to my buyer.
Sometimes my cash buyers would not pay me the assignment fee until settlement.
In this case, I directed them to use my title company and would not produce the
original LLC documents until we were at settlement and I was assured that I was
going to get my check.
On other occasions, my buyer needed to borrow money for the purchase. In these
instances, I always directed them to use a private lender who was familiar with
my routine, which went as follows. My buyer requested a loan for his purchase
price, which included my assignment fee. For example, my purchase price with the
bank might have been $30,000, but my buyer requested a $33,000 loan to cover the
$3,000 assignment fee he agreed to pay me. From the $33,000 loan proceeds,
$3,000 would remain after settlement which the title company would give to my
buyer in the form of a check to the LLC. My buyer would then endorse that check
over to me at the settlement table.
To recap, here are the steps in the process:
1. Make offer in the name of an LLC. I often include the property address
in the name of the LLC.
2. Once the offer is accepted, create the LLC. Check with an attorney
and/or your Department of State regarding the procedures and costs for forming
an LLC.
3. Assign/sell your membership (ownership) in the LLC to a buyer once you
receive your assignment fee. Check with an attorney regarding the documents
required to assign/sell an LLC.
4. Collect your assignment fee in the form of cash or a check made out to
the LLC and endorsed over to you by your buyer (the new owner of the LLC).
5. Celebrate! Congratulations on a job well done.
To some, this process might seem a little involved, but it really is very
simple. Once you have done a couple, you will be amazed at how easy it really
is.
Blessings,
Steve
Bio:
Since 1998 Steve Cook has flipped many hundreds of houses as an active
Baltimore-area real estate investor. Steve's unique specialty is the "flipping
homes 1-2 punch", a proven system of real estate investing that powerfully
combines wholesaling and rehabbing houses. Steve Cook is dedicated to helping
others succeed through understanding and aggressively applying his time-tested,
step-by-step approach to flipping real estate.