Ask Andrew: Contract Assignment
By: Andrew Goodman
Q: What is the theory behind assigning a contract?
A: In today’s real estate market, you don’t see it happening too often. However, in the “bubble,” assigning contracts to another buyer happened quite a bit.
Let’s use the following example: Andrew is under contract for a home located at 123 Main Street. He has a ratified contract on the property with a sales price of $1,000,000.
Mike is in the market to buy a home and just can’t find one that fits what he and his family are looking for. They fell in love with 123 Main Street when they viewed the home at one of the listing agent’s open houses.
Unfortunately, Mike dragged his feet and Andrew snatched up the property. Since Andrew has a ratified contract, Mike can only submit a back-up offer. Mike is determined to purchase 123 Main Street and decided to have his Realtor contact Andrew’s Realtor at Goodman, Realtors.
Mike offered Andrew $100,000 for him to walk away from the contract. Andrew didn’t think twice and agreed to Mike’s offer.
Now, even though Mike and Andrew have agreed to assign the contract to Mike, the seller must agree and sign off on the assignment. If the seller doesn’t agree to the assignment, the current contract is still enforceable and Andrew is still under contract to purchase the subject property.
If the seller agrees to the assignment, Mike would technically be paying $1,100,000 for the property. The seller would still gross $1,000,000 for the sale and Andrew would receive $100,000 from Mike to purchase the home.
What if Mike doesn’t have the $100,000 cash to pay Andrew?
Mike would try to incorporate the $100,000 into his loan and finance it. The potential problem with this is the appraisal. The home must appraise for the $1,100,000 sales price in order for Mike to finance the assignment fee. Since the appraisal process wasn’t as strict in the “bubble” as it is today, the appraisal wasn’t a huge issue and this would probably be feasible.
Today though, most sales max out their appraisal values so there wouldn’t be enough room to incorporate the assignment fee to Andrew in the loan. So, in this scenario, Mike would need to find another way to come up with the funds to pay Andrew.
Some investors purchase with the sole intention to assign contracts to potential buyers. These investors shop, negotiate and ratify contracts on homes that they know they can sell or assign without doing anything to the home.
Basically, these investors are in the game to collect an assignment fee and that’s it. Because of the risk of the seller not agreeing to the assignment, the investor adds the clause “and/or assigns” after his or her name so the investor is permitted to assign the contract to a potential buyer.
This is very risky, but if you plan on doing this as an investor, include a decent inspection (contingency) period to give you more time and a better chance of generating interest.
Both buyers and sellers should consult with their Realtor before agreeing to a contract assignment.