Assignment of Purchase Agreement
An assignment of purchase agreement and sale is when a buyer of a new home sells a third party the right to assume the purchase contract.3 min read
2. Obtaining the Builder's Consent
3. Preparing an Assignment of Purchase Agreement
An assignment of purchase agreement and sale is when a buyer of a new home sells a third party the right to assume the purchase contract. In this situation, the buyer is the assignor, and the third party is the assignee. Under the agreement, the assignee pays a higher price. This agreement must take place in the time between when the assignor agrees to buy the home, but before the contract closes with the builder.
With this period, the assignor never takes the title of the property. Instead, the title is put in the name of the assignee. This is informally known as "flipping a home." The flipping of a home occurs when:
- The original buyer enters into a purchase contract and assigns the contract to the third party before closing ends.
- The original buyer makes a profit from the sale.
If the sale does not close, the seller will lose time, money, and resources.
Advantages and Disadvantages of an Assignment of Contract
There are several advantages of an assignment of contract. With an assignment of contract, you are not actually flipping a home. Instead, you are flipping the contract, which means you don't have to have the financial backing to purchase the property. Not only do you not close on the property, but you will also not have to pay any closing costs or take on any additional expenses.
For wholesale flippers, using the assignment of contract is a way to save thousands of dollars each month. For example, if the closing costs per property are $1,000, and you "flip" 10 properties, that is a $10,000 savings.
Wholesalers only need to put down the purchase contract deposit amount that will be held in escrow with the title company or with an attorney. The lower the deposit, the lower the risk that will be assessed. Deposits may be as low as $10 or $100 and will be easier to lose if there are any delays or issues.
An assignment of purchase agreement allows the assignee to buy into new and desirable neighborhoods that are no longer available through the builder.
The main disadvantage of an assignment of contract is the risk of not finding a buyer. If a third-party buyer is not found, and you are under contract, you are responsible for completing the contract. Additional responsibilities include the responsibility of:
- Existing liens.
- Property taxes.
In addition, if the financing of the assignee cannot be obtained before the closing, this may cause the assignor to be responsible for the closing costs and the purchase of the property. The assignor may also not be able to get his or her deposits returned.
Obtaining the Builder's Consent
For an assignment of a purchase agreement to be valid, the builder and assignor must first have a valid legal contract in place that shows the assignor is obligated to purchase a home or condominium unit from the builder.
The buyer may limit how the property can be sold, including that the property cannot be listed on the MLS (multiple listings service). If it is, it is seen as a competing with the builder. If the assignor puts the property on the MLS, it will be a breach of contract, and the builder will be entitled to damages or rescission of the contract. The buyer will also be able to retain any deposits that have been paid and any other money paid for upgrades and extras.
The assignor must also clearly state the property is an assignment of an agreement of purchase with the builder and not a direct sale from the assignor.
Preparing an Assignment of Purchase Agreement
When preparing the agreement documentation, there are questions that should be asked to determine responsibility. Some of the questions to be asked are:
- Who will be preparing the documents?
- Who will pay the cost to prepare the documents?
- Will the assignment agreement and written consent of the builder be prepared by the builder's attorney? And will they cover the costs?
- Can terms agreed to by the assignor and builder be negotiated by the assignee? If so, who will cover the costs, and how will they be resolved?
A detail that should also be negotiated is the responsibility of paying the commission of the assignment agreement.
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